The Importance Of Professional Indemnity Insurance For Accountancy Firms
Outlining the need for accountancy firms to have professional indemnity insurance in place and explaining why this is.
Professional Indemnity Insurance is the insurance every Accountancy company must have in place. Indeed a firm should not perform any work without the adequate cover.
This insurance protects the company or partnership against claims for financial losses to clients as a result of the advice from the practice. This financial loss could be for an error, mistake, negligence or a breach of professional duty.
Ultimately if you are the partner of a practice then you could be personally liable for such claims. As much as sound review processes and procedures are put in place the larger the number of employees within the firm the more exposed you may be from one of the above occurring.
Professional Indemnity Insurance provides a level of protection to the company or the partnership, it is very important that the engagement letter for each client also handles maximum exposure. For example you can put in the letter of engagement that any liability for a claim is to a maximum of (say) 10 times the fee for the piece of work, that way limiting your exposure to within the level of your insurance.
It is vital that each year that the insurance is renewed that new figures are relayed to the insurance company or insurance broker.
In a practice that does more payroll, bookkeeping and statutory accountancy advice for example the insurance premium should be fairly low as there is a little risk in reality of a financial claim to be brought against the business.
Those that perform audit work and taxation advice, particularly taxation planning however, could be dealing with very specific advice that if not correct could cause the client to lose a lot of money in taxation payments. This type of advice is very objective usually in nature, doing a certain method of tax planning will result in a definitive tax saving to the client. Should this not be the correct advice then the door is wide open for being sued for financial losses. Likewise the signing of an audit that is used in a transaction for example and errors are found could quite easily lead to a financial loss case against an accountancy firm.
Professional indemnity insurance provides protection and peace of mind against this and can work in conjunction with a robust internal review system and with carefully worded engagement letters to protect both the business and the partners within the firm.
Paul Lee write his views on Indemnity Insurance on behalf of John Heath Insurance