Recognizing and managing risk as an accounting professional
Whenever your job is working with someone else's money, you knowingly take on the associated risks. Accountants, tax preparers and other financial industry professionals recognize this.
Not only are there a good number of federal regulations governing your legal responsibilities to clients, you also have the personal and professional risks involved with making the right choices for your clients. Whether that’s providing retirement account advice to a young newlywed couple or helping a disheveled single parent navigate the complexities of the U.S. tax code, you have to weigh the satisfaction of a job well done with the chance that you may find yourself on the receiving end of a legal dispute.
What Risks Affect Accountants and Tax Preparers?
While mitigating risk and reducing the potential for errors is key to your business, this can be difficult at times, especially when an account is particularly complex, or when a client fails to reveal all of the information you need to make the best choices and stay compliant with legal standards. That said, there are some notable risks that affect accountants and tax preparers on a regular basis:
● Contractual agreements (e.g., privity, or common law requirements)
● Negligent acts or errors on your part
● The danger of unknowns, such as employee fraud and other criminal acts
There are some benefits to working in a heavily regulated industry. On the one hand, the common risks generally relate to state and federal requirements that are, for the most part, well understood within the industry. However, requirements can change frequently, and when you’re working with clients nationally, or even internationally, you may run into risks that you did not even know were there.
Accountants and tax preparers are duty bound—and legally required—to follow the contract they’ve signed. While at times this can be difficult, ensuring you follow the contract to the letter will help you stay on the right side of your clients, and the law. That said, some contracts can be difficult to follow to the letter, making it far easier for an accountant to be on the receiving end of a lawsuit.
There are some contractual requirements that are easier to follow. For example, your contract may stipulate that you carry certain types of insurance. It’s not uncommon for your contract to require you to carry an Errors & Omissions insurance policy. That said, an E&O or professional liability is a good policy to carry, whether contractually required of not, as it will help cover any errors you may make while managing an account.
When you do end up with a complex, multi-faceted account that is challenging, you may find yourself in a tough situation in case a client feels you’ve made an error or there was a negative financial impact. In those cases, you may need to protect yourself from negligence claims.
Negligence and Financial Loss
As stated, you may find E&O or professional liability insurance to be necessary for you business due to your contract requirements, but also valuable due to the potential complexities of the work. In these cases, it becomes far easier to have a negligence claim aimed your way.
Additionally, when a client believes there was an error from which they experienced a negative financial impact they may hold you responsible for it.
This is especially true for accountants, but can even occur for tax preparers. If you failed to find all of the relevant write-offs, deductions and credits for clients, they may end up paying more in taxes in the end than they would have had to. That negligence can lead to a lawsuit. E&O coverage will help mitigate the costs of this kind of accident.
And while tax preparers have a professional liability risk due to the nature of the work, businesses that handle auditing and valuation may be at even greater risk. Not only these firms have liability risk associated with the immediate client, but there may be third parties, such as investors, that make financial decisions based on your valuation. If the results of your valuation or assessment impacts how much investors are willing to contribute, or results in investors deciding not to contribute at all, your firm may be held responsible.
The Danger of Unknowns
There are a lot of unknowns involved in providing services within a heavily regulated industry. While there’s certainly a focus on staying on the right side of the law—this can be difficult when laws change from state to state, or are revised. In addition, you can’t control the actions of all of your employees. You place your trust in them, to a point, but their actions can easily bring your entire business down in certain scenarios.
For example, when your firm is handling seasonal workload increases, such as during tax season, you may need to hire subcontractors to help handle the increase. Those subcontractors may be vetted initially, but they will also have access to private customer data for a limited time. Although we like to believe everyone we hire has good intentions, it would not take long for a subcontractor with ill intentions to steal a significant amount of customer data and do damage to both customers and the firm in general.
Fidelity or crime insurance might protect your business against this particular issue. Indeed, it’s likely a good idea to carry insurance to protect against a large number of potential crimes that can occur from wayward employees or subcontractors. Aside from insurance, it’s a good idea to take certain risk mitigation steps to protect your business’s liability. A common method of doing this is by formalizing and distributing procedures for handling client accounts and use of sensitive information. By doing so, your practice clearly indicates expectations of all employees when it comes to service and confidentiality.
In addition, a business can minimize the potential downside impact of a data breach or other risk-scenario by creating incident response plans. These are increasingly popular for companies with cybersecurity concerns, as an attack or issue with client data can be quite complex while needing to be addressed quickly.
Protecting against the unknown can protect accountants and their clients.