The threat of an errors and omissions (E&O) lawsuit can be especially daunting for CPAs who work alone or with a small team.
Though staying lean and cutting expenses wherever possible is important for small businesses, and the median cost of E&O insurance is about $400, this is a policy you probably can't afford to skip. The fact is, no matter how diligent you may be while working on a client's books, mistakes do happen.
For example, if you fail to detect irregularities in a company’s financial records, the consequences can be daunting. An E&O lawsuit can result in significant legal defense fees and even higher damages – often up to $200,000, as reported by Philadelphia Insurance Companies, one of our carrier partners. You may also be called in front of NASBA and risk having your CPA license revoked. The financial strain could be enough to put you or your small firm out of business.
Protect your CPA firm from potential E&O litigation by following these three best practices:
1. Make sure you have enough coverage. Talk to your insurance agent to ensure that your policies adequately address the level of risk your business faces. I recommend that my clients purchase an E&O policy with a minimum of $1 million in liability protection. This is generally enough to cover legal fees and damages if you find yourself on the receiving end of an E&O lawsuit.