Finance and accounting professionals who are targets of lawsuits divert limited financial resources and redirect attention away from their firms' business objectives into expensive legal costs. Being the target of legitimate lawsuits can tarnish reputations, ruin careers and cause financial hardship. In extreme cases, the firm can go bankrupt, jail time is meted out or professional certifications can be rescinded. Given the extreme consequences of a lawsuit, it is essential that you take steps to protect yourself and your company. Read on to learn simple strategies for reducing your risk of being sued.
Importance Of Culture
A culture of sound ethics and business principles is a critical component for professional service firms seeking to avoid lawsuits. Senior executives should set the proper "tone from the top" and ensure that employees understand that the office has a culture of responsibility and accountability in the tasks they undertake on the firm's behalf. Cutting corners (ignoring confidentiality provisions, non-payment on significant payables, sharing of privileged client information to outside parties, inept and lazy execution during due diligence) invites lawsuits, especially if a party suffers significant damages. (To learn what to do when that devil on your shoulder begins to whisper, read Ethical Issues For Financial Advisors and Eight Ethics Guidelines For Brokers.)
Finance and accounting professionals should be cognizant of two important things:
- The fiduciary duty of the firm to its clients and shareholders
- The governmental regulations and compliance environment within which the firm must operate
Adhering to Fiduciary Duty and Acting in the Best Interest of the Client
When a company takes on a new client or shareholder, there are significant fiduciary duties that arise as a matter of law. If fiduciary duty is violated, grounds for a lawsuit against the company is created. For instance, a board of directors can breach its fiduciary duty to the company's shareholders if it does not carry out a responsible merger with another company. There could be grounds for a lawsuit by the company's shareholders if the company is acquired for significantly less than what might otherwise have been secured (with another party or with effective negotiating).
Respecting and adhering to fiduciary duty also means providing complete and accurate information to your client. Misleading information, such as false credentials or incorrect data, and not having the client's best interests in mind can be grounds for a lawsuit. (To learn four steps to reduce your liability when dealing with other people's money, check out Meeting Your Fiduciary Responsibility.)
Negligence is Not a Valid Excuse
Negligence can also be a basis for getting sued. Nothing irritates the offended party more than the age-old excuse of "I didn't know." When finance professionals are hired by a client to conduct a valuation analysis of a company, they can be sued if there was a lackadaisical effort in coming up with a valuation figure. Reasonable steps should be carried out, such as researching the value of related companies or conducting a discounted cash flow analysis. The client can suffer damages by selling the company for less than fair market value due to the inept recommendations of the consultant (who did not execute the assignment with care). (Read more about this type of analysis in our Discounted Cash Flow Analysis Tutorial.)
Clients share a variety of sensitive information that is not meant to be shared with the outside world:
· Sensitive personal matters (tax planning or divorce)
· Proprietary information (such as new technology or inventions, or customer lists)
· Financial data (such as pricing and margins)
Maintaining confidentiality is essential to protecting your clients, their interests, and your firm. A professional who receives an inquiry from someone outside of the company, be it someone from the media or a potential competitor, should remember this duty of confidentiality. When speaking publicly about the company, it is usually best to coordinate the effort through an official spokesperson. (Learn how company information can sometimes be obscured in Five Tricks Companies Use During Earnings Season.)
Have Adequate Insurance
An easy way to prevent personal losses when being sued is to maintain adequate insurance coverage. The most inexpensive insurance coverage does not always cover all types of claims that can be brought against you. If it is foreseeable that someone could file suit against you, you need to make sure that your insurance policy actually covers the activity in question. Personal assets can be at stake if the insurance coverage is not enough to cover the liability. (Read more about minimizing the risk to your assets in Asset Protection For The Business Owner.)
A common type of lawsuit filed against a company is a sexual-harassment suit. These suits are common because the person claiming sexual harassment does not have to sue the person that harassed them, but rather they can sue the company for allowing this type of activity to occur due to lack of oversight. Employees who engage in activities that cross the line must be dealt with immediately. The longer that sexual harassment is tolerated, the greater chance that the company can be sued for fostering such an environment. (Read what steps you can take to avoid this problem in Protect Your Company From Employee Lawsuits.)
Having the right organizational culture is the most important factor for a firm and its professionals to avoid being sued. That means everyone in the organization clearly understands expectations when it comes to business practices and the consequences for acting unethically. Finance and accounting professionals should always act in the best interests of their clients, adhere to fiduciary duty, maintain confidentiality with respect to sensitive information and have adequate insurance just in case.
If you are the one with a complaint, before you blame your advisor for your losses, be sure you know your rights and responsibilities. See Tips For Resolving Disputes With Your Financial Advisor for more information.