The Evolving Role of Risk Management in Accounting

Risk does not often come to mind when accountants are mentioned. However, in recent years, accounting has evolved from a purely financial role to include consulting. Accountants must now be privy to a world of emerging risk factors, not only for their clients, but within their own firm.  

Disruptive technology such as generative AI, ever-changing compliance rules, and a changed workforce dependent on a hybrid or fully remote model are just a few of the risks accountants must manage to present clients with better decision-making data and protect their firms from harm.  

This post will discuss the intricacies of risk management in accounting. 

The importance of risk management in accounting

In accounting, risk management involves identifying risks, assessing the likelihood of said risks occurring, controlling risk through strategy, and regularly reviewing and reevaluating those controls. 

Implementing robust risk management strategies in accounting offers several key benefits. First, risk management helps prevent financial losses by identifying potential errors early, thus ensuring financial stability for a client or the firm. Additionally, it helps meet regulatory compliance with tax laws and accounting standards, safeguarding from legal issues or penalties and bolstering credibility. A proactive stance on risk management also builds and protects client trust, reassuring them about data security and financial accuracy, strengthening long-term relationships. 

These benefits are not simply anecdotal either. A PWC Global Risk Survey found that organizations with strategic risk management are five times more likely to inspire stakeholder confidence and achieve superior business outcomes, and twice as likely to anticipate faster revenue growth. 

Types of accounting risks 

Clients

When managing risks for clients, accountants contend with several key risk categories. 

• Financial: Accurate financial data can help clients achieve their growth goals. Accountants can help them strategize cash flow and debt and advise on diversification efforts. 
• Compliance: Tax laws and accounting standards are routinely changing. CPAs must know current regulations and best practices to help their clients avoid fines or other negative consequences. 
• Operational: Legacy technology and processes can slow growth, impede goals, and create security gaps. Accountants can help identify and plan to mitigate these operational inefficiencies. 
• Cyber risks: Data breaches are a fact of life. Organizations of all sizes and types need to plan to mitigate the threat of cyberattacks. In 2024, the estimated average expense associated with data breaches was $4.88 million. 

Also read: Is Your Firm Ready? Machine Learning for Accounting is Here to Stay

Firms

While these same risks also apply to accounting firms, CPAs have additional risk factors to consider. 

• Liability: Errors and omissions can have serious repercussions for accounting firms, ranging from lawsuits to reputational damage. Accountants must have a solid understanding of internal processes and create ways to review and continuously improve these processes to offset the risks of professional liability. 
• Fraud: Fraud, whether from internal employees, client behavior, or third-party vendors, is a serious risk. Accountants might even face partial liability for not reporting fraudulent activities by clients. 
• Internal cybersecurity: While all industries must contend with cyberattacks, accounting firms are attractive targets for bad actors due to the sheer amount of sensitive data they must handle.  

Risk management processes for accounting

While each client and firm will have its own risk profile and tolerance, certain steps can apply to all organizations: 

• Step 1: Risk Identification - Identify all potential risks and threats to your accounting business. 
• Step 2: Analysis - Estimate each risk's potential severity and likelihood, and prioritize them. 
• Step 3: Risk Avoidance - Avoid risks entirely when possible, especially those posing significant threats. 
• Step 4: Risk Reduction - Mitigate unavoidable risks by implementing measures to minimize their impact. These strategies include adopting the latest technology, diversifying income streams, or implementing new processes. 
• Step 5: Risk Acceptance - Accept certain minimal risks when the cost of mitigation outweighs the potential consequences. 
• Step 6: Communication - Inform and train staff on established risk management procedures. 
• Step 7: Risk Monitoring - Continuously monitor for new risks and update your risk management plan. 
• Step 8: Risk Transfer - Where applicable, transfer financial burdens of risks to a third party, such as an insurance company. 

The changing compliance landscape

The conversation around risk management in accounting is especially pertinent given recent updates to accounting standards.

Effective December 15, 2025, the Auditing Standards Board (ASB) issued new quality management (QM) standards. These risk-based standards for CPA firms' attest practices require extensive analysis to design and implement revised QM systems. Firms that have not adopted the new standards should transition now to avoid errors. 

PCAOB-registered firms and government audit entities should follow their respective quality control standards, as the new AICPA standards do not apply to them.  

FAQ

Q: What is the role of accountants in risk management? 

A: Accountants play a key role in recognizing, evaluating, and managing financial risks. They ensure that companies comply with regulations and provide guidance on strategic choices to safeguard the organization's financial well-being. 

Q: What does risk management entail in accounting and CPA? 

A: In accounting and CPA, risk management involves identifying, assessing, and addressing potential risks affecting an organization's financial stability, adherence to regulations, and overall goals. This process includes evaluating risks, setting up controls, and monitoring their efficiency.

Q: How do accountants and CPAs pinpoint risks? 

A: Accountants and CPAs pinpoint risks by reviewing financial statements thoroughly, conducting internal audits, analyzing market trends, evaluating operational procedures, and assessing compliance with laws and regulations. They leverage their expertise and knowledge of the industry in this process.

Q: How do accountants and CPAs help to reduce risks?

A: Accountants and CPAs help reduce risks by establishing control procedures and advising management on effective strategies. They create internal control systems, conduct compliance audits, develop risk management frameworks, and suggest best practices to minimize risks and enhance performance. Additionally, accountants can help manage internal risks by obtaining professional liability insurance.

Risk mitigation with insurance

The best way to avoid accountant liability is to transfer the risk to an insurance provider. Transferring risk to an insurance company, like with Professional Liability Insurance, shields your firm from financial burdens, allowing you to operate without fear of bankruptcy due to a liability claim.

Mistakes happen. Even the most vetted risk management program is not invulnerable. Professional Liability (Errors and Omissions) Insurance protects accountants from costly legal claims and is essential for any practicing accountant. Protexure Accountants offers competitive rates and personalized service tailored to small CPA firms. 

Questions? Get in touch.