Accountant's Liability

What is 'Accountant's Liability'

An accountant's liability describes the legal liability assumed while performing professional duties. An accountant is liable for a client's accounting misstatements. This risk of being responsible for fraud or misstatement forces accountants to be knowledgeable and employ all applicable accounting standards. An accountant who is negligible in his or her examination of a company can face legal charges from either the company or investors and creditors that rely on the accountant's work.

BREAKING DOWN 'Accountant's Liability'

Accountant's liability adds an element of pressure to an accountant's performance of duties. An accountant's actual participation in fraud can be hard to prove because management could be committing the fraud, which the accountant failed to notice. This makes the accountant legally liable for being negligent of fraud or misstatements, even if he or she had no direct hand in committing them.

The standard of care applicable to the conduct of audits by public accountants is no different to that applied to doctors, lawyers, architects, engineers, and others providing skilled services for compensation, and that standard requires reasonable care and competence therein.

For ordinary negligence, an auditor owes a duty only to his or her client. An auditor’s liability for general negligence in the conduct of an audit of its client financial statements is confined to the client. That being the person or business entity who contracts for or engages the audit services. Other persons may not recover on a pure negligence theory.

Many accountants believe that they can not be liable under the Federal securities laws because their practice does not involve securities. However, the comprehensive definition of securities indicated in the statutes and the pertinent case law has left many accountants subject to unanticipated liability lawsuits. It is not uncommon for accountants and auditors to carry professional liability insurance to cover such areas as:

  • Network and information security offense coverage
  • Security breach remediation and notification expenses
  • Investment advisor coverage
  • Personal fiduciary coverage
  • Crisis event coverage
  • Pre-claim assistance