Understanding professional indemnity insurance for accountants
Professional indemnity insurance should be a key consideration for you if you are an accountant or bookkeeper, regardless of whether you’re a self-employed or freelance consultant, or you employ a team of accounting professionals. Due to the complexities of the trade, the potential for error and omissions in the advice and services that accountants provide can be significant – so much so that by law in Australia, if you’re providing accounting services to the public, you are required to hold a minimum level of professional indemnity insurance.[1] Sometimes the risk can be presented through your own clients’ actions and misdemeanours, as we discover from one case study.
Sources of indemnity risk for accountants
Some of the main sources of indemnity risk exposure for accountants include:
- Errors and omissions – making a mistake, for example failing to lodge a client’s tax return on time to the ATO, providing incorrect advice, making a bookkeeping error, providing an incorrect business valuation, or failing to properly carry out an auditing function
- Compliance – failing to comply with regulatory and legislative requirements
- Fraud and dishonest conduct – via your own unethical behaviour or financial mismanagement, or even conflicts of interest that are not disclosed.
All of these can lead to significant financial loss and reputational damage.
Strategies to reduce your indemnity risk
There are a number of steps that accountants can take to help mitigate their professional indemnity risk exposure:
- Establish internal controls to help prevent mistakes from being made in the first instance. This can include processes for reviewing and approving work, as well as procedures for identifying and addressing potential risks.
- Maintain accurate and complete records of your work and processes. In the event that a claim is made against you, this can help demonstrate that you have taken appropriate steps and precautions to consider and respond to your clients’ requirements, and mitigate risks.
- Stay up-to-date with Australian professional and ethical standards, by completing the professional development and training set by the Accounting and Professional and Ethical Standards Board. This ensures you are up-to-date on industry standards and best practices, so you can continue to provide high-quality services to your clients.
Of course, the best way to manage risk in your accountancy practice is to avoid making errors or breaches in the first instance. However, mistakes can happen even when the best controls are in place, and it is possible that you could even be held to claim over errors or breaches made by your clients.
Case study: Good recordkeeping settles claim in accountant’s favour[2]
In one case, an accountant was retained to provide accounting and taxation services to a number of companies within a group. Over several years, the administrative manager of one of the companies stole millions from accounts held by the group’s bank and deposited the money into their personal account.
Even though it was the client’s own employee who committed the breach, the accountant was sued for negligence and for breach of retainer, on the basis that they failed to:
- Exercise due care, skill and diligence
- Draw to the client’s attention the unusual or large adverse movements in account balances
- Recommend appropriate courses of action and further investigation.
The claim was settled in the accountant’s favour. This is because the accountant was in a strong position to defend the allegations made against them by their client – their files were impeccable with all matters well documented, including the terms of the retainer. They were also able to demonstrate they had raised concerns regarding the financial performance of the trading entities and their internal controls, and recommended the appointment of an external specialist to review the group’s procedures, even though the recommendations were not followed.
Professional indemnity insurance is key for accountants
Accountants are detailed and diligent by the nature of the services they provide. However, from time to time, mistakes can occur in the services and advice you provide your clients.
The potential for errors and omissions, compliance lapses, and cybersecurity threats can present very real financial and reputational challenges. To better manage these risks within your own accounting firm or consultancy, consider implementing some proactive measures including internal controls and processes, rules around due diligence and good recordkeeping, and keeping up with your ongoing professional learning and development.
Professional indemnity insurance is an essential consideration to help protect your practice and clients. It helps provide your business with financial protection against legal claims and potential damages brought against you, allowing you to navigate your professional journey with more confidence.
Depending on the size and nature of your business, you may also wish to package your professional indemnity insurance into a more comprehensive insurance program which includes:
- Public liability cover – this provides protection in the event that a third party is injured or incurs property damage on your premises
- Cybersecurity cover – this cover helps protect your business and clients from the fallout of a cyber attack, and can even provide access to 24/7 cybersecurity support and ransom negotiators
- Business interruption cover – which helps cover loss of income in the event of an unforeseeable event that disrupts your business – for example, a global pandemic.
It’s important to recognise that there may be a range of insurance options that you ought to consider to help address the risks for your business.
If you have questions or any uncertainty around securing cover for your accountancy practice, consider talking to a specialised accountancy broker or risk advisor who understands your business, and can help you find the right insurance package – with adequate coverage limits, and at the right price point.
[1] CPA Australia, Professional indemnity insurance | CPA Australia, accessed 18 August 2023.
[2] November 2021, AIG, ProfessionalEdge – Keep your edge with AIG: A simple and dynamic professional indemnity guide. Example republished with AIG’s permission.
