How to Keep Your Firm Safe From Liability

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At this time of year there is considerable room for error, and it is important to keep as many checks and balances in your processes as possible.

You may not know it but you could be susceptible to liability for even a simple mistake or miscalculation. Even after busy season, anything from client engagements to how you store or exchange data can have you and your practice subject to a lawsuit. Liability insurance certainly helps, but there’s a lot to know to keep yourself out of trouble, even if you think you are doing everything above board.

We recently spoke with John Torvi, vice president of marketing & sales at The Herbert H. Landy Insurance Agency, which works largely with tax and accounting professionals. He offered some advice on how accountants can keep themselves safe from liability, as well as some of the more common scenarios where problems can occur.

AW: Why has professional liability come more into focus?

Torvi: It’s been a hard issue for accounting professionals, but in terms of trends anytime the economy tanks, people who provide professional services come under scrutiny and can often get sued. Accountants are not immune to this and people looked closely at what went wrong. Tax professionals who work as a part of estate planning and valuation, people who lost money even on paper went back and looked at where the accountant was a part of the planning and the suits followed. As for right now, the tax code is more complex than ever and there’s more margin for error. In fact, over half of the claims we get against accounting professionals are related to tax preparation. So, if you look at our thousands of accountants we serve, nearly half are related to tax preparation. That includes missed deadlines and, believe it or not, failure to use the right forms.

AW: What are some of the most common ways accountants put themselves at risk?

Torvi: One thing is an overreliance on software and technology, taking out the critical thinking part where someone has to think about what they do rather than plugging in information. Audits are also common areas of risk. During the processes, something could easily get missed. Also, failure to detect fraud is a big issue. One thing we tell tax professionals and accountants is they can get into a lot of trouble when they don’t do a good job of explaining the scope of work. Oftentimes, the engagement letter says one thing and it stays open ended, and they fail to define when the scope of work ends. All of a sudden, that firm, that accountant becomes liable. In addition, one of the fastest-growing threats to accounting professionals who store data is privacy theft and data security or cybercrime.

AW: What are some top measures small firms can take to protect from liability?

Torvi: Clearly define expectations in an engagement and disengagement letter. Another thing, which is difficult for small firms, is they need to be able to say “no” to clients. They need to differentiate and cut some of the dead weight. You should know why a client wants to hire you, especially after they used another firm for, say, 10 years. Find out more about your potential client, the services they want, and what happened in the past. You can easily be taking on a problem client. Also, train your staff, if you have staff, on what’s new (tax code updates, software, privacy and data concerns, etc.). We can’t assume all tax and accounting professionals are doing this. There’s lots of information out there.

AW: Can you offer advice to firms expanding their services into new areas?

Torvi: Whenever a firm ventures into an area where you don’t have expertise or training, you can ask for trouble. Get advice from an experienced practitioner or a mentor. If you hire staff to venture into new areas, make sure they also have the expertise needed. If you need to do training to get up to speed, do the training before you expand. Businesses want to grow and expand, and it’s a natural process, but if you aren’t prepared, you can lead to lawsuits and loss of reputation and clients. Also, build an advisory team, even outside of accounting like legal or insurance. They can help keep your firm on the right track and potentially safe from liability.

John Torvi will be speaking in more detail at the upcoming Scaling New Heights event, May 22-25. His session, An Accountant’s Guide to Minimizing Professional Liability, will provide an in-depth understanding of specific issues and circumstances that lead to lawsuits, as well as tips on how to avoid malpractice claims or complaints. He will also cover the “ins & outs” of a professional liability insurance policy.

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