Professional Indemnity Issues Encountered By Accountants

Professional indemnity coverage is vital for any business working in professional services – and that certainly includes those in the accountancy sector. While the likelihood of a problem is relatively low, negligence claims do happen – and probably more often than you’d think.

Our guide to professional indemnity for accountants explains the various ways in which things can go wrong, how to handle professional indemnity claims, and how to ensure that you have the right level of cover in place for your practice.

Common Professional Indemnity Claims

It may surprise you to learn just how many professional indemnity claim types there can be! However, there are four claim types that prove to be the most common.

1. The first is tax advice and compliance errors. These can include anything from incorrect calculations to missed tax filing or payment deadlines.
2. The second is audit and assurance failures. Claims of this type may include negligent auditing processes or an accountant’s failure to detect fraud.
3. Bookkeeping and financial statement errors attract further negligence claims. Here, an accountant may have kept or submitted inaccurate records or made misstatements about a client’s accounts.
4. Finally, breach of confidentiality and data leaks can also see claims made against your practice. Whether intentional or otherwise, these claims include unauthorised disclosure, as well as data breaches of all types.

Negligence and Breach of Duty

If an accountancy practice is negligent or deemed to have breached its duty, this could result in professional indemnity claims.

These claims could include a failure to maintain a duty of care and professional standards. Here, it may be that you have failed to meet client expectations or breached a particular industry standard or code of conduct.

Negligence claims against an accountancy practice can have serious consequences. As well as the financial losses associated with such claims, there can also be significant reputational damage. With accountancy so reliant on word of mouth, it can be tricky to come back from claims like these.

Of course, you may feel that allegations of negligence are untrue, which is why it is important to defend against these claims. In these situations, detailed documentation, solid paper trails, and expert witnesses, where relevant, can help defend your position.

Generally, negligence claims in accounting can be avoided by having the right risk management strategies in place. The first step is to identify any potential risks before forming a mitigation plan and communicating this to your entire team.

Regulatory Compliance Issues

Cover for professional indemnity for accountants should also protect against regulatory compliance issues.

These include anti-money laundering (AML) obligations. By law, accountants are required to undertake client due diligence, as well as to report any AML suspicions they may have. Failure to do so could result in legal action.

Data protection and GDPR compliance aren’t confined to the accountancy sector. However, because of the large swathes of client data you hold – and sensitive data, too – any failure to handle data securely or to have privacy policies in place can have serious consequences.

Accountants must also abide by reporting and disclosure requirements, including those relating to financial reporting as well as whistleblowing.

Non-compliance with regulation can result in hefty fines, legal action, or being struck off professional registers.

Cyber Risks and Data Breaches

It is likely that a great deal of your data is computerised, even stored in the cloud. Emails, client databases, client documentation…all these – and more – need protection from cyber risks and data breaches.

Accountants must be aware of the risk of cybersecurity threats and vulnerabilities, including malware, phishing, and hacking. Data breaches can significantly impact accountancy practices, disrupting operations, obliterating client trust, and incurring regulatory fines.

Cyber liability and insurance coverage can help protect you in these circumstances. For maximum protection, be sure to opt for both first-party and third-party coverage.

Accountancy practices should also take measures to prevent cyber risks and data breaches. These could include carefully chosen antivirus and malware protection, a focus on data security, and full training of your team on how to remain safe. You should also document your planned incident response so your entire organisation knows how cyber threats will be handled, giving clients peace of mind.

Handling Professional Indemnity Claims

The resolution of a professional indemnity claim isn’t a speedy process – it can take anything from a few months to several years, depending on its complexity and severity. However, every claim follows the same process.

Once a claim is brought against you, you should notify your indemnity coverage provider in a timely fashion. Along with this report, you should provide any documentation that relates to the claim.

It is in your best interests to cooperate with your insurer and legal counsel, follow any advice you are given, and provide all of the required information.

One of the most important tasks for your practice will be mitigating your losses and minimising your reputational damage. Having a crisis management plan in place before the event will make this task easier. Client communication is also crucial: the way you interact with the claimant during the claim process can have a significant impact on your reputation going forward.

Once the claims process is over, take time to debrief and document any lessons learned. You may be able to implement new strategies to prevent future claims, such as changing existing processes to minimise the risk of error.

Maintaining Robust Indemnity Coverage

Professional indemnity insurance isn’t a legal requirement for accountants. However, it’s the sensible, logical choice – and many professional associations will require you to hold a certain level of PI coverage as a condition of membership.

While such organisations will dictate a minimum level of cover, the indemnity coverage you choose should be based on your exact requirements. This will require you to assess your risk exposure and coverage needs, taking into account your practice areas and your client profiles.

Balancing cost and protection, you should select the appropriate policy limits and excesses for your practice—and remember, things can change. Your cover levels should be reviewed and renewed regularly, in line with policy updates and general market trends.

Finally, be sure to disclose all relevant material facts to your insurer. Should you fail to do so, you may find that your cover is invalid.

Joining ICPA for Support

Planning around professional indemnity for accountants – and choosing the right cover – can seem daunting. However, there’s help at hand.

When accountants and bookkeepers register for ICPA membership, they have a host of resources and guidance at their fingertips, including a library of practice management resources and technical advice lines run by accountants for accountants.

You’ll enjoy access to experts via telephone, online events and face-to-face networking events, as well as discounted insurance schemes – including professional indemnity insurance, with cover levels to suit your needs. Membership includes £300,000 of cover as standard – incredibly competitive when compared with other market offerings.

ICPA members also benefit from risk management and professional development support, including training and guidance on industry best practices.

To benefit from support with your professional indemnity planning – and plenty more – join the ICPA today.

Professional Indemnity FAQs

How can negligent tax advice or compliance errors lead to claims?

Negligent tax advice or compliance errors can result in your clients being penalised – through no fault of their own. They will seek financial compensation by filing a professional indemnity claim against your practice.

Can a breach of confidentiality or data leak result in professional indemnity claims?

Absolutely. As an accountancy practice, you handle incredibly sensitive data – and are bound by law to keep this data safe. Should this safety be compromised, your clients have every right to file a claim against your practice.

What penalties or disciplinary actions can accountants face for regulatory non-compliance?

Penalties for regulatory non-compliance may include fines, legal action, or removal of accreditations and professional association memberships.

What steps can accountants take to mitigate losses and reputational damage from claims?

Accountancy practices should ensure that they have risk management strategies in place to minimise these risks. By identifying any potential risks and mitigating them against them, you can create a risk management plan, which should be communicated to your team. In addition, maintaining the appropriate level of professional indemnity cover can give you further peace of mind.