In a rough economy, when liability claims against accountants tend to rise, it's especially critical for CPA firms who expand their practices beyond their comfort areas to know exactly what their policy covers and to make any necessary adjustments. It's especially important considering that liability carriers treat issues differently in their policies, according to Gary Sutherland, chief executive of North American Professional Liability Insurance Agency, an independent broker.

"The hard issue right now is data loss, and every carrier is addressing it differently," he said. "For example, the American Institute of CPAs program [Aon] and CPA Gold have both put out a cyber-security endorsement to their policies as a rider. Travelers took a different approach and just made changes to their base policy. Philadelphia has an endorsement which is sold as an additional premium, while some have not addressed the issue but are examining it to determine their position."

The issue of data loss is becoming commonplace, according to Sutherland.

"We're seeing it on a weekly basis with potential claims coming in as a result of stolen laptops, security breaches, and the like. It can result in significant costs to accounting firms just to notify current and past clients when something like this happens. In one case, they set up a phone line to answer questions 24/7. It's an interesting dynamic, because the last thing you want is to send out a letter to 3,000 people that they may be victims of a security breach because of you."

Client identity theft continues to be a huge issue, according to Rickard Jorgensen, chief executive of Ridgewood, N.J.-based Jorgensen & Co.'s CPA Gold.

"Many insurers offer endorsements to provide this coverage, which should arguably be part of a standard policy," he said. "However, some insurers tie coverage to 'professional services,' as opposed to the broader 'legal liability' coverage. Semantics perhaps, but in the hands of an insurance adjuster it could be a possible reason for a denial of coverage. We have seen several claims concerning theft of laptops containing client personal information, or laptops left on trains or in cars. We have even seen CPA client information stolen via dumpster diving."

"On the topic of electronic fraud, we have also seen a variation on the 419 Scam, where an accountant was duped into paying a fictitious bill to a dummy foreign company on behalf of a client," he said. "There are bad people out there."

Bill Thompson, president of Alachua, Fla.-based CPA Mutual Insurance Co. of America, agreed. "The accountant definitely needs to be aware of data security," he said. "We changed our policy a couple of years ago to incorporate or add electronic media coverage and identity theft for our member clients to cover a data breach."


Thompson noted that the poor economy should be a caution flag to accountants. "They don't want to become a cheerleader for clients with financial problems, especially when their client may be renegotiating with banks for additional funds. They should be more ready to use going-concern opinions [a statement expressing doubt as to the ability of a company to continue as a going concern], especially on audit and review engagements."

"Personal financial planning services continue to be problematic following the Madoff situation," Jorgensen said. "There have been claims against CPAs for recommending an investment advisor that represented Madoff, mini-Madoff, or feeder funds. We have seen claims against CPAs arising from the audit of benefit plans that invested in fraudulent securities, although the CPA was not responsible for evaluating the investments. Even tax preparers have been touched by claims from high-net-worth investors who allege the CPA should have known the investments were too good to be true."

But the economy does generate malpractice suits against accountants, pointed out John Torvi, director of marketing at Needham, Mass.-based Herbert H. Landy Insurance. "It's not that people in the accounting profession have become less capable, it's just that people are looking for ways to get out of debt or bad business situations. In addition, clients aren't paying their bills. Where the accountant goes after them, the person who didn't pay in the first place will make a counterclaim to avoid the bill," he said.

"That's a real danger for accountants," warned Torvi. "Underwriters look at how many fee suits an accountant has been involved in during the past 12 months. If there is a significant number, it's a red flag, because the underwriter wants to be assured that the accountant has good office procedures and controls. A lot of lawsuits against an accountant can be an indication of poor office procedures in general."

An area of concern for Kim Stone-Vilim, underwriting manager for Geneva, Ill.-based Insight Insurance Services, is the regulation of tax preparers.

"This could have a huge impact on accounting firms," she said. "The new regulations, as currently proposed, would require all firm personnel that do any type of 'substantial work' on clients' tax returns to register with the IRS and pass a test if they are not a CPA, EA or an attorney. What constitutes substantial work is quite broad. Those that don't register and pass the test, if required, would be in violation of IRS regulations and therefore would not be insurable."

No. 1: Suing the client for fees.

No. 2: Advising both parties to a transaction, or helping them to resolve a dispute.

No. 3: Participating in business deals with clients.

No. 4: Failing to communicate with clients in writing.

No. 5: Mistaking adherence to the professional standards as a substitute for "getting it right." Source: CAMICO Mutual Insurance Co.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access