Accounting Liability Insurance: What You Need to Know

Accounting has always been a challenging profession, and with today’s maze of regulatory compliance, the stereotype of accountants as bean counters couldn’t be further from the truth. Even the most diligent accounting professionals now face risks that can threaten their operations, reputation, and bottom line. Accounting Insurance from Auto&General Insurance is designed to protect accountants and accountancy firms against a broad scope of risks, including liability, reputational damage, and theft.

6 Liabilities faced by accounting firms in South Africa

Most countries—including South Africa—follow the International Financial Reporting Standards (IFRS) for accounting practices. However, accounting professionals also need to adhere to country-specific regulations. This exposes them to different risks and liabilities, depending on where they and their clients are based. In South Africa, these include:

1. Unlimited liability framework: For partnerships, sole proprietorships, and Personal Liability Companies (Inc.), the unlimited liability framework means personal assets are at risk if the business faces claims or debts. For a Personal Liability Company, this extends to previous directors but not the owner.

2. Regulatory and litigation risks: Compliance with the Companies Act, Tax Administration Act, and other regulatory frameworks is mandatory, and errors in adhering to these regulations can lead to severe penalties. Additionally, since accountants are often the first point of contact for compliance-related advice, they are vulnerable to litigation if clients allege negligence.

3. Cybersecurity concerns: With accounting firms relying heavily on digital tools, cyber risks have become a primary concern. Threats such as phishing attacks, ransomware, and data breaches are rising. A 2022 study by Liquid C2 revealed a 62% increase in targeted cyber-attacks against South African businesses 2. A ransomware incident or loss of sensitive client data can lead to severe reputational damage and financial losses.

4. Errors and oversights: Mistakes such as incorrect tax calculations, missed deadlines, or misinterpreted financial data can lead to substantial client losses. A simple oversight, like forgetting to account for a tax deduction, could result in a client facing penalties or overpaying taxes, prompting claims for compensation.

5. Damage, loss, or theft: Physical risks are just as relevant. Given the high value of computers and other equipment, accounting firms can be prime targets for theft. Additionally, incidents like fires, floods, or power surges can disrupt operations, and replacing essential equipment can be financially debilitating.

6. Employee misconduct or fraud: In some cases, firms may face liabilities due to unethical behaviour by employees 3, such as embezzlement or falsifying client records. These actions can lead to financial losses and damage client trust, with significant legal repercussions.

Accounting Insurance offers protection against physical losses, along with public and employer's liability, business interruption, and a fidelity guarantee.

What accounting liability looks like - could it happen to you?

Accounting liability often arises in unexpected situations, even when you have taken every reasonable precaution. Below are three scenarios that illustrate some risks you or your firm could face:

The unlimited liability framework in action

A mid-sized accounting firm operates as a partnership. During a busy tax season, one partner incorrectly classifies a client’s income on a tax return. This results in the client incurring penalties from the South African Revenue Service (SARS). The client files a claim for damages, and under the unlimited liability framework, the entire partnership bears the cost, including legal fees, settlement payouts, and reputational damage. A combination of Accounting Liability and Professional Indemnity Insurance can protect each partner in situations like this, or those involving regulatory missteps.

Damage or loss following a fire

A fire breaks out in an accounting firm’s office, causing extensive damage to essential equipment such as computers, servers, and filing cabinets. This disruption halts operations, delaying client work and damaging the firm’s reputation. The cost of replacing the destroyed assets, repairing the premises, and finding temporary office space places significant financial strain on the business, further complicating efforts to resume normal operations.

Employee misconduct results in legal and financial fallout

A junior accountant at a firm is caught falsifying invoices for personal gain, leading to significant losses for several clients. Although the misconduct is isolated, the firm is held accountable for failing to prevent or detect the fraud. The firm incurs costs related to client compensation, an internal investigation, and implementing new compliance measures to avoid future incidents. As news of the misconduct spreads, the firm also faces challenges in retaining existing clients and attracting new ones.

While hypothetical, these scenarios demonstrate that accounting liability arises from various circumstances, some beyond direct control.

5 Ways the right Accounting Liability Insurance cover can mitigate risk

Accounting Insurance offers protection for the unique challenges faced by accountants and accountancy firms. Here’s how this insurance can mitigate risks:

1. Protection against professional negligence claims: Even minor errors or oversights, such as miscalculating tax liabilities or failing to meet deadlines, can lead to significant financial losses for clients. Accounting Insurance can cover claims of professional negligence, ensuring that legal fees, settlement costs, and other associated expenses are not carried by the firm alone.

2. Regulatory compliance coverage: Compliance errors can lead to penalties, fines, and legal disputes. Accounting Insurance provides coverage for legal fees and penalties resulting from unintentional non-compliance, allowing firms to focus on rectifying issues without worrying about the financial burden.

3. Cybersecurity and data breach risks: With increasing reliance on digital tools and cloud-based platforms, accounting firms are prime targets for cybercriminals. Accounting Insurance may exclude some aspects of cyber incident coverage, including data recovery costs, notification expenses for affected clients, and public relations services. However, business interruption and physical damage to tangible property caused by a cyber act might be covered.

4. Reputation management: A damaged reputation can be as costly as a financial loss. Whether it’s due to a professional error or a publicised lawsuit, rebuilding trust with clients requires strategic communication and outreach. Some Accounting Liability Insurance policies include reputation management services to manage crises and restore public confidence.

5. Customised coverage for partner and employee risks: The unlimited liability framework in partnerships places all partners at risk for the actions of one. Similarly, employee mistakes or misconduct can expose the firm to liability. Accounting Insurance can be tailored for these specific risks, ensuring that partners and employees are covered.

By providing comprehensive coverage across multiple areas of liability, Accounting Insurance allows accountants and firms to focus on their work, knowing they are prepared for whatever challenges may arise.

Get a Liability Insurance quote

Protect your accounting firm against unexpected liabilities with Accounting Insurance. Secure peace of mind by requesting a Liability Insurance quote now! Our team is here to answer any questions and guide you to the right cover for your needs.