As CPA firms across the country continue to experience ongoing growth, they are also facing increased risk and complexity due to shifting business models and service offerings. And yet, many CPAs and accountants forgo professional liability coverage to manage expenses. This may be short-sighted, as the cost of a malpractice claim can be financially devastating to a CPA firm. That’s why it’s critical for firms to understand their risks, their liability and their coverage options before deciding to “go bare.”

Why Do Some Firms is ‘Go Bare?’

“Going bare” in accounting means abstaining from carrying professional liability insurance and, instead, relying on your own finances to cover you in the case of a claim arising from its professional services. There are many reasons CPAs believe they don’t need professional liability coverage, including these myths:

• MYTH: Small firm clients don’t sue, so professional liability insurance isn’t needed. TRUTH: Smaller firms may be sued as well as any other size firm, but the financial impact could be even greater for a smaller firm.

• MYTH: They’re more likely to be sued if they’re insured. TRUTH: When faced with losses, anyone could sue you and your firm. It isn’t dependent on whether you’re insured, but the financial impact may be drastically different if legal expenses and settlement costs are self-funded.

• MYTH: They’re managing their risks. TRUTH: Mitigating risks doesn’t mean avoiding them. Sometimes the unexpected happens.

Can an Accountant be Held Responsible?

Yes, an accountant or CPA can be held responsible for losses related to their services. If a client believes they incurred losses because of their accountant’s lapse in their professional duties or has failed to provide appropriate advice, the client can bring a demand or lawsuit against the accountant. Accounting firms, therefore, must stay vigilant when it comes to due diligence in risk management, delivering professional services and carrying adequate professional liability insurance coverage. Otherwise, they may face costly legal consequences.

Legal Liabilities That Accountants May Face

Accountants have a duty to their clients and a standard of care that is applicable to their services. Violations of the standards may result in disciplinary action. Assertions in a professional liability claim may include:

• Breach of contract: If you have a written agreement with your client and you do not fulfill the terms of that agreement, a client could assert a breach of contract.

• Fraud: If a client believes there was an intentional misrepresentation or intent to deceive, and the client relied on the false information, a client can allege fraud.

• Negligence: Failure to comply with the professional standards applicable to the service could result in a negligence claim.

Risks for an Accountant Going Bare

There are many risks associated with going bare and forgoing professional liability insurance, including:

• Legal: Human errors and omissions, like mistakes in financial records or poor financial advice, are examples of negligence. If these occurrences result in a loss by a client, they can bring a lawsuit against you or your practice.

• Financial: Financial risks of not carrying adequate professional liability coverage include the payment of legal expenses and any resulting settlement or judgment. A lawsuit may increase future insurance premiums and make it more difficult to secure coverage. For small firms especially, the financial hardship of a lawsuit could necessitate extreme measures, like filing for bankruptcy.

• Reputational: The risk to a CPA’s or accountant’s reputation can be significant. Involvement in lawsuits can be damaging to an accountant’s or firm’s image. If a suit gains media coverage, it may be difficult to recover.

• Personal: CPAs and accountants risk their mental health and may suffer emotionally and psychologically due to the stress of a demand or lawsuit situation.

Why Accountants Should Consider Professional Liability Insurance

From failing to provide advice to providing incorrect advice to failing to identify a filing obligation, there are many reasons CPAs and accountants might be sued, which is why it’s key for them to explore professional liability insurance to address the risks mentioned above. Insurance can help protecting their reputation; cover defense costs, as well as any additional settlements or judgments that can result from a lawsuit; and offer peace of mind so CPAs can stay focused on client work.

Going bare isn’t a decision to make lightly. And if your firm hasn’t opted to take out professional liability coverage yet, there’s no time like the present. Take some time to consider the risks you and your firm face on an ongoing basis and ask yourself what you would do if a situation occurred that required a legal defense, and how you would feel about the possibility of paying attorney fees or a settlement out of pocket. You may ultimately determine that professional liability coverage is a smart decision you could make for your firm’s future.