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Accounting firms deal with multiple clients daily, which means they regularly look at a lot of sensitive information. As you no doubt already know, there are many risks inherent in running an accounting business. There are three main types of severe risks that accounting businesses will face regularly. Accounting firms must practice intelligent risk management to minimize their firms’ exposure to risks to keep their clients and staff safe.
The first risk that accounting firms have to face is IT security. In this day and age, if you pay attention to financial news, it seems like financial information is stolen on a large scale almost every day. Accounting firms also have to minimize the risk of client lawsuits in an increasingly litigious business environment. Finally, accounting firms must also protect their facilities from damage and break-ins as well as guard their most valuable asset: their staff. This last type of risk is perhaps the most overlooked category of risk by accounting firms, but it is severe and requires management to safeguard the future of the firm. Read on to learn more about the most significant risks to accounting firms and what your firm can do to manage these severe risks.
IT Security Breaches
Potentially the fastest-growing risk that accounting firms have to face in this day and age is their IT security. Accountants certainly have more sensitive financial data saved from various clients than most other types of businesses have saved for their respective clients. A data breach could be catastrophic. There will almost certainly be damage claims made by the various clients. Of course, there could also be high compliance costs. Perhaps most damaging will be the hit that the firm’s reputation will take, which could take years for you to erase. The damage to the firm’s reputation, of course, will lead to a related loss of business.
Claims for Damages From IT Security Breaches
One of the highest costs that a data breach may expose an accounting firm to is expensive claims for damages. One of the accounting firm’s clients, or even a third party, can file direct claims to cover any expenses they have suffered related to the damage caused by the data breach. Also, an accounting firm that has suffered a data breach may have to deal with cross-claims, which could take the form of a class action or individual lawsuits for indemnification damages suffered as a result of the data breach. Data breaches can cost the clients of accounting firms millions of dollars, so clients will almost certainly bring claims for the damages.
Compliance Costs Associated With a Data Breach
Respected research firm Ponemon did a study in 2017 that showed a data breach costs roughly $141 per record. A significant portion of this cost comes from the need to comply with state notification laws. Every state, along with the District of Columbia and the territories of Puerto Rico, the Virgin Islands, and Guam, have laws that require compromised firms to notify people and businesses of their compromised records as a result of a security breach. Should an accounting suffer a security breach, it is very likely the firm will also have to pay for forensic investigation and credit-monitoring services for the clients who have had their data compromised. Depending on the extent of the data breach, these costs could reach into the hundreds of thousands of dollars.
Damage to the Firm’s Reputation
Damage to the reputation of a business in any industry can result in substantial financial problems. Reputation damage can be more pronounced in the accounting industry because of the massive amount of trust it takes for a business to give accountants their sensitive financial information. Even the perception of unprofessionalism can result in many lost clients. It is almost a foregone conclusion that an accounting firm will lose the clients with compromised records. However, it is nearly inevitable the accounting firm will lose clients whose data is not compromised simply because a firm’s data is vulnerable. A recent security breach may also scare away many potential clients.
Even though the damage to an accounting firm’s reputation is hard to quantify, this may end up being the most significant loss of any of the types of damages that result from a data breach. It can take years for an accounting firm to restore its reputation after a severe data breach. It may be expensive to restore this reputation as many accounting firms will end up hiring expensive reputation management firms to help them rebuild their brands after a data breach.
As previously mentioned, the business environment these days is increasingly litigious. A litigious environment is especially true for accounting firms because mistakes can lead to IRS audits, penalties, and back taxes. Many clients, especially business clients and high-income individuals, will file lawsuits to recover these costs from their accounting firms if a mistake from the accounting firm is the cause. These lawsuits are likely to result in the accounting firm being held accountable for damages. Your firm may even have to end up paying for the cost of litigation, which can be astronomical. It is also worth keeping in mind that an accounting firm’s insurance premiums could go up sharply if you lose a lawsuit.
Damage to the Firm’s Property
Accounting firms are subject to risk regarding damage to their facilities. Facility damages include severe weather, power outages, or other problems that are entirely out of the firm’s hands. Not only could the facilities be damaged, but damaged client records are also possible in many circumstances. It is also important to note that accounting firms could be at serious risk of a criminal break-in. Some criminals may break into accounting firms simply to steal computers or other valuable items. Still, some accounting firms have suffered break-ins from criminals looking to steal sensitive financial documents.
If you are a sole proprietor working from home, it is essential to note that a homeowner’s insurance policy does not provide insurance protection for such a loss. That’s because these are business losses, and running a business from your home is not covered under your homeowner’s insurance. Even if you are running a small operation out of your home, you should have a business owner’s policy. It is a good idea to consider getting additional coverage to manage damage to your facilities and other risks you run through the course of business.
Risk to Personnel
We can agree that an Accounting firm’s personnel is the most valuable asset because work requires a high level of skill, education, and experience, which means that qualified personnel is relatively challenging to find. Any firm needs to protect its employees, both on a human level properly and because employees are valuable assets. It’s vital to ensure that your firm has the appropriate workers’ compensation, disability, health insurance, and other types of coverage to safeguard your employees. Some firms, especially small firms, will try and skimp on these types of coverage because the costs can be high. However, accounting firms have to protect their most valuable financial and technological assets, so it makes sense that they have to protect their valuable human assets as well.
Risk Management for Accounting Firms
The risk management landscape for accounting firms is evolving as new risks are emerging. As previously mentioned, liability risks that could result in litigation are probably the most significant risk for accountants in the 21st century. Unfortunately, this risk only seems to be growing. It can cost an accounting firm many thousands of dollars to defend itself against a lawsuit. The lawsuit is also a matter of public record, so it may end up being a hit to the firm’s reputation as well. Unfortunately, lawsuits often take years to settle.
Not only will accounting firms have to deal with the cost of legal representation during this time, but they’ll also have to use up valuable work time to defend themselves against such a lawsuit. Accounting firms are technically not required to have liability coverage. However, a prudent accounting firm in this day and age should carry professional liability coverage to ensure that litigation costs do not put them out of business. It is also essential to ensure that the business has coverage for the other risks mentioned here, and professional liability coverage is the most critical type of coverage for an accounting firm looking to manage its professional services risks.
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