It’s a common situation worldwide, a business undergoes financial trouble for whatever reason, and chooses to sue the accountant as a viable option. Though it’s an unfair fact of life, it’s a fact nonetheless. There can be any number of reasons for this to happen, from actual error on the accounting firms part, to the hiring business simply needing an influx of money. In this article we’re going to discuss how best to avoid a lawsuit as an accountant, as either part of a firm or a sole trader.
There are many basic steps that an accountant can take to minimize the risk of a lawsuit, but unfortunately there are no guarantees. Lawsuits do not even have to be filed by the hiring business themselves, and oftentimes it is a third party which decides to sue. Over 1 in 4 accounting lawsuits come from third parties aiming to recover their losses; lenders to the business hiring the accountant, third parties, and in-house lawayers can all attempt to sue you.
One of the key aspects to avoiding a lawsuit is to always keep a clear, dated record of any arrangements made with the company hiring you. Contractual agreements are invaluable in court proceedings, and oftentimes having a detailed record may disuade any potential lawsuit from happening in the first place. Verbal agreements, though classed as a binding legal contract in some places, are rarely admissible in court due to the simple fact that there’s no records of them. The contract holder may not be present, or they may deny any knowledge of such an arrangement. If there is ever a verbal agreement between the two parties, a simple email confirmation is all that is needed to establish that a contract was formed. Make sure both parties have a copy of the agreement, as this can stop many lawsuits in their tracks before they reach court.
Another major factor in avoiding any lawsuit is a slight extra cost for you at the time, but overall it does end up paying off. When forming any contract with a business, make sure to have a third party lawyer check over the documents before signing anything. Having a companies in-house lawyer check over a contract is useless at best, as they are hired by the business to best protect them, not best protect you. There are many situations in which contracts leave the accountant open to be sued for any number of reasons, from the usual negligence and incompetence, to suing if the company undergoes hardship. Unfortunately, if you have already signed this then there is little legal recourse you can seek.
There is a very obvious double-egded-sword which we haven’t discussed yet, which may not be readily apparent to people reading this; Insurance. Most accountants have some form of Errors and Omissions Insurance which can be used to defend your practice in many cases, but this comes with its own dangers. The average compensation awared to a business when suing its accountant is much lower if the accountant has no insurance. Better insurance means lower personal monetary liability, but also makes your firm a target for lawyers to sue, as they know they will get a large payout if their side wins. Obviously, insurance is always best practice, but be wary of advertising your specific insurance provider or package; company lawyers will definitely pay attention to this.
If worst does come to worst and your business is undergoing litigation, then the fight may be a long one – spanning months to years in a civil suit. With insurance, it may be best practice to simply pay the party and avoid lengthy court times, as the publicity for any accountant is dire in this situation. Years in court can financially ruin many small businesses, not to mention the reputation damage. One last note; if a company or representative of does sue your accounting firm, it’s best to sever professional ties with them. It may seem obvious, but you would be surprised how many firms forget this.