PI Insurance: Accounting For Mistakes

When an accountant has been working with a client in good faith it can come as something as a shock when the client begins legal action against them. There can be several kinds of claim an accountant could face, such as a client suing in the belief that the accountant had got the audit advice wrong. They could sue the accountant for breach of the retainer, or the failure to provide services to an adequate level.

The second class of claimants is third parties who have in some way seen or relied on the accountant’s advice. There were a lot of these sorts of claims in the 1980s and the 1990s with people saying that accountants bought shares based upon the audited accounts.

Whatever the reason for the court case, those that have taken out professional indemnity insurance will be eternally grateful for it. Professional indemnity insurance provides essential financial protection in the event that a client suffers financial loss as a result of alleged neglect, error or omission.

Professional indemnity insurance will meet the cost of defending claims and any damages payable. There are numerous cases which attest to the absolute importance of accountants being in possession of a bullet-proof professional indemnity insurance policy.

One such involved an accountant whose brief was to prepare and submit a client’s tax returns. The returns were submitted late for several years running and penalties were imposed. The client alleged negligence against the accountant and sought substantial compensation.

Another involved an accountant who was employed to advise on the purchase of another company. The client wanted to offset the profits of their own company against the losses of the purchased company with a view to limiting any tax liability.

The accountant's instructions were specific. They gave advice on how to achieve the least tax liability and recommended that the best way was for the two companies to abridge their accounting periods to that of the same length. This advice was not entirely correct and the client company did become liable for stock relief claw back. The accountant was pursued for negligent advice.

see Finance & Accountants' Insurance or Tax Industry specific policies