Why do accountants need professional indemnity?
Being detail-oriented and meticulous is key for any accountant. After all, your job is to be across the small print of documents, crunch endless numbers – and help clients reduce their financial risk. That said, mistakes happen, and accountants are equally at risk of getting into legal hot water as the clients they’re trying to protect.
Of course, being sued is not a good look if your practice relies on word of mouth for the majority of referrals. That’s where professional indemnity comes in, providing a buffer for your practice, and reducing your risk in case of a claim.
4 reasons clients might sue their accountant
There are several common claim scenarios accountants may face in the act of providing advice or service to their customers, most commonly relating to negligence and breaching your duty of care.
- Providing incorrect advice
Most accountants at one time or another will have been asked for specific advice by a client that they may not be licensed to give. For example, all chartered accountants providing SMSF advice to clients must hold either a full or limited Australian Financial Services Licence – or risk giving incorrect advice and being held liable. Similarly, providing tax advice in the tricky complex area of trusts and estates is another common reason for PI claims.
- Tax return errors
The documents involved in your average tax return can be numerous and the busy tax season can be demanding for CPAs. On occasions, a mistake may slip through on a client’s return. This might involve an accounting error, tax exemptions that have been missed, or the accountant incorrectly assessing the client’s tax liability. If the client received a significantly lower refund due to the error, they may sue for compensation.
- Late submissions
Sometimes a client will submit paperwork at the 11th hour, putting enormous pressure on their accountant to lodge documents on time. However, if you are required to lodge documents such as PAYG, BAS and superannuation remittance to the ATO, and fail to do so within the required timeframe, unnecessary penalties and interest charges may be imposed on the client. In turn, they may sue the accountant for compensation over the late submission.
- Third party subpoena
If a past or current client is audited and sued, the accountant may be subpoenaed to review the client’s financial history and documents – and can be liable for any accounting errors, even if it’s years later.
How to avoid being sued
It’s an important question, as any claims made against your practice can affect both client retention and bringing new business through the door. A lawsuit will also go on the public record.
To protect yourself and your firm, ensure you comply with the Australian Professional and Ethical Standards and stay within your realm of experience – taking on specialist or complex work you don’t completely understand may be more likely to lead to unintentional errors. Being meticulous about paperwork and putting systems in place to track and store records, files notes and emails with clients is also key.
You should also ensure your PI covers you for the services you provide and be proactive if those services change or if you become aware of a complaint or a claim.
Maintaining public liability insurance is both a condition of your practicing license as a chartered accountant and could be a lifesaver in the event of a claim. For information about PI, contact Roy Chen on 0472 877 991 or firstname.lastname@example.org.
Please note: This information is of a general nature only. Readers are advised to seek legal advice on any particular matters.