Nearly half of professional service providers faced allegations of nonperformance by customers, underscoring the need for errors & omissions insurance, according to a 2020 study by The Hanover.

An error or oversight by a financial professional, such as an accountant or auditor, could lead to a financial loss, not only in terms of the mistake made but from a costly and time-consuming lawsuit, as well. To a certain degree, mistakes are inevitable, but having a well-structured E&O policy in place can help mitigate the risk and protect those involved.

While “claims of professional negligence in accounting might often be based on 'technical or calculating errors,' which do occur, it is not uncommon for these claims to be based on a misunderstanding between the two parties," says Joseph Jones, director of risk management for professional liability, Travelers.

As tax season approaches, agents can help their professional financial services clients have sufficient E&O coverage in place. There are myriad of issues that can lead to a claim against accountants, including missed filing deadlines and disputes over fees and billing, where E&O coverage provides the necessary protection against a potential threat to the accountant's business and license.

Here are four tips agents can share with clients to help them avoid E&O claims during this season: 

1) Know their client. “Accountants should not take on business without proper screening and background checks and should be aware if clients have sued previous certified public accountants (CPAs)," says Cooper O'Connor, senior broker, professional, management and cyber insurance, Burns & Wilcox in partnership with McGowan Program Administrators.

To ensure this is the case, individuals and professional services firms should “spend time getting to know customers and their particular needs," says Lee Genecki, vice president of professional liability, Travelers. “No two professional firms are alike, and a deeper understanding of their exposures and concerns is critical."

2) Confirm the scope of service. By identifying and confirming the exact services that will be provided to a client, an accountant can prevent misunderstandings and mitigate the time and money spent on defending a nonperformance accusation.

“Always use letters of engagement when providing any audit services," says Tyler Peterson, senior vice president, head of professional risks, Hiscox. “These are critical for laying out the scope of services and responsibilities between parties and helping to manage liability."

And with tax season approaching—whether it is an individual accountant or an accounting firm—“agents should ensure their clients are discussing everything that will be needed to file ahead of time, especially when e-filing," O'Connor says. “Accountants will get information from other accountants, and they will rely on other CPAs for information—agents can work around this in disclaimer letters to ensure they are not responsible for information provided by other CPAs."

3) Keep financial data secure. Accounting firms—which have access to sensitive financial and other personal client data—are a top target for cybercriminals, according to the Journal of Accountancy. As cyberattacks continue to accelerate, “accountants can take steps to shore up their data management systems, since accounting professionals have access to and store a lot of personal and financial data for their clients," Jones says.

For example, when dealing with wire transfers, accountants should “be sure to verbally confirm bank account numbers and wire instructions with their clients before any fund transfers happen," Peterson says. “There are currently high volumes of wire fraud." Finance and insurance are in the top ten industry segments that account for the majority of wire fraud by occurrence and value, according to a report by Verafin.

And while “wire fraud is not traditionally covered under an E&O policy, if you have customers regularly involved in transferring client funds, be sure to look into available cyber liability coverage that will cover these activities," Peterson explains.

4) Keep up to date with changes in laws, regulations and professional standards. A major challenge for all levels of accountants is ensuring they are keeping up with changes to the tax code, as well as accounting and tax management systems to handle taxes online. Also, any changes in tax laws or regulatory requirements can correspond to an increase in risk exposure for accountants.

Further “it is also important for clients to invest in a good tax reviewer on returns after the preparer drafts them," O'Connor says. “As staffing continues to be an issue, with many firms turning to outsourcing, they tend to have less oversight over controls."

Olivia Overman is IA content editor.