An essential aspect of running any business is appropriately managing risk. There are so many unforeseen and unanticipated events that can occur. It's virtually impossible to have a specific backup plan for every one of them that might arise. That's why insurance is so important. But accountants have specific risks from which only professional liability insurance can protect. Many small practitioners choose to forego this type of coverage. But, they do so at their peril. Here are five reasons why every firm, large or small, should have professional liability insurance.
Your Professional Reputation is One of Your Largest Money-Making Assets
Accountants spend much time and money gaining the skills and experience they use in practicing their craft. Each project or client helps them to increase their good name. That, in turn, helps them to gain new projects and clients. This professional reputation can be a precious asset, and it needs protection.
When a mistake is made, it's imperative to attempt to make it right as soon as possible. How you handle such circumstances is also part of the reputation you build. Keeping a high level of professionalism and fairness in the situation is crucial. But there are times that issues cannot be resolved quickly. This is when professional liability insurance can help in that resolution. Even if the firm or practitioner is not ultimately at fault, the assistance that the insurance coverage provides can be significant. The provider can act as an intermediary and as a researcher, helping to determine how the issue arose and how best to settle it. This approach and solution can aid greatly in maintaining a positive professional reputation.
Your Homeowner's Insurance Doesn't Cover You Even if You Work Out of Your Home
Homeowner's coverage is essential insurance to have. But it doesn't cover everything. In fact, even if you work out of your home, and many more professionals do these days, homeowner's insurance doesn't cover work-related claims. Claims resulting from the practice of accounting are most often handled through accountants' professional liability coverage. Insurance can be complex, so it's important to be clear on what policies cover what.
Your Time Needs to be Spent Wisely
Disputes with clients can't be ignored. And, if possible, they need to be resolved quickly and with the least harm to all parties involved. But, if a dispute escalates and cannot be fixed promptly, it's important to realize that professional liability insurance can also help you conserve your time. Respecting time is imperative. Lost time can never be recovered. It might be wise to think of reputation and time as the two most significant aspects to a successful accounting practice. Protecting both is vital and can be accomplished, at least in part, with professional liability coverage.
Professional Liability Insurance Covers Unintentional Mistakes or Errors
One of the most critical roles that established accountants and accounting firms perform is preparing new accountants for their careers. But this role can be tricky. Part of getting experience is making mistakes. New accountants have missteps. It's the role of the seasoned accountant to find those mistakes and teach why there is an error. And this needs to happen before the work goes out the door. But that doesn't always happen. Plus, even seasoned accountants occasionally have oversights that don't get caught before they get back to the client. After all, humans do have slip-ups.
All of this makes professional liability insurance all the more critical. Unintentional mistakes and errors will happen. Every firm has checks and balances to keep such things from happening. But, when something slips through the cracks, it's important to have Plan B. This Plan B should be professional liability coverage.
Even the Most Prudent Advisors Sometimes Miss the Mark on Advice
An essential prerequisite for providing professional advice is fully understanding the pertinent facts. But that can often be tricky, especially if the client doesn't really understand the details of transaction or situation. One reason that a professional advisor can often command high fees is that valuable advice is given based on a limited set of facts in a specific circumstance. The advice is targeted and right on point. But if any "fact" turns out to be inaccurate or a piece of information is wrongly interpreted, the advice can be faulty. And, if that advice creates adverse circumstances for the client, the client often looks for some sort of remedy from the advisor.
A strong defense against this sort of situation is thorough scoping of work followed by complete documenting in an engagement letter signed by both parties. This engagement letter process forces both client and advisor to pay attention to the facts and be clear to each other about the understanding of the details. It helps everyone to be on the same page. Many a potential disagreement has been avoided by making sure the engagement letter states who is responsible for what and what the engagement is supposed to address. Including a sign-off on the facts as part of the action plan for a project helps both parties be more engaged. Starting with good facts is one key to a successful engagement.
Professional standards also serve as an additional way to manage risk. They were put in place for a reason. They protect both the professional and the client. A meaningful way to demonstrate reasonable actions is to show that professional standards are being followed. The is an initial protection that can also help keep insurance coverage from ever having to be used.
The importance of professional liability insurance cannot be diminished. Its role in a successful accounting practice is crucial. There are so many factors that can increase the risk to a firm. Rules and regulations are continually changing, and many transactions are becoming increasingly complex. The practice of accounting is fascinating, but adherence to professional standards and best practices are not enough. Together with the protection of professional liability insurance, practitioners and firms alike can be equipped to prosper in what's often a harsh and critical business world.