Just like any industry, there are possible issues that can arise due to less-than-expected results or service provided by professionals. If a client feels mistakes caused by a service provider qualify to be considered negligent they can sue. But how far does this liability go for those who work in accounting? Should accountants be liable to third parties if they conduct an audit in a negligent way
Some argue that they should only be held liable if their work is characterized as fraudulent. But courts have mostly decided against that notion and have found that foreseeable third parties could bring tort actions for negligence against an accountant.
With this in mind, it’s important for accountants to look into certain coverage policies that can protect against claims of fraud or negligence from disgruntled clients. There are accountants professional liability insurance options that can help outline defensive measures when allegations are brought forward.
Breaking It Down
According to USLegal, an accountant is liable for damages to his or her client for “fraud and negligence, but s/he is liable to third parties, who the accountant knew or should have known were relying on audit, only for fraudulent conduct, and proof of mere negligence is not sufficient.”
Essentially, this wide umbrella includes a variety of professionals, including those who work in finance and accounting. Accountants are hired to perform audits for their clients’ financial statements, not necessarily the lenders or third parties of their clients. While it can be argued that the law should be reluctant to invoke a duty of care on the part of accountants, it wouldn’t be wise to ignore the fact that accountants know firsthand that their work is being combed through carefully. Financial statements accountants and auditors oversee will be relied upon by financial institutions when it comes to financial decisions.
This paints the picture that accountants should carry the weight of a company’s financial goings-on after a certain point and be held liable for any misstep. However, outside accounting firms aren’t traditionally on the hook for every portion of financial statement auditing.
Typically, smaller companies who hold accountants liable for mistakes based on negligence rely on their accounting services to prepare and review/audit all their available financial statements. However, management, or those in charge of in-house finances are usually in charge of the preparation of statements. What’s more, privately held companies usually don’t have their statement audited.
If an accountant or their firm as a whole is unaware that the service they’re providing will be considered by a lender, there is no duty of care. Regardless, it’s imperative for accountants and firms to be aware of legal ramifications and legal outlines of each financial auditing assignment. Having the right coverage in place as well as the right education on negligence will be the difference maker in possible legal matters.