This is Part 1 of a three-part series discussing the basic components of a professional liability lawsuit brought against an accounting firm and its partners, and the factors a firm’s managing partner should consider before and during this type of litigation for utilizing applicable insurance coverage, maximizing effectiveness of defense and, where possible, bringing the controversy to conclusion by settlement. Part I focuses on the current litigation environment for accounting firms, relevant provisions in engagement letters, responding to subpoenas, professional liability insurance, and the risk of instigating a professional liability counterclaim in a fee-collection action. Part 2 will cover differences between litigation in state and federal courts, and in private arbitration, initial assessment of a professional liability claim, development of defense strategy, and the stages of litigation from the initial pleadings through discovery. Part 3 will cover the latter stages of litigation from summary judgment proceedings through trial and will conclude with the mechanics of and strategies for settlement negotiation.
An unfortunate reality among accounting firm managing partners (MPs) is that at some point—if not more than once—while serving as MP, a client will sue one or more of your partners and the firm itself for professional malpractice. As primary leader of your firm, at first you will experience disbelief and denial that a client has blamed your partners and firm for a financial reporting error the client itself caused, mostly or entirely due to its own incorrect accounting entries, which normal and proper review procedures were not designed or intended to detect or correct. Once past the initial grief, anger, or both, as your firm’s leader, you will need to move forward by working with lawyers that you, your firm’s general counsel, or its professional liability insurer have selected to defend the claim, toward navigating the mater to resolution. This article will aid the accounting firm MP in traversing, with the guidance of legal counsel, the typically rough terrain encountered in defending a professional liability lawsuit. Readers of this article will be able to sleep at night while dealing with this challenge, in part, because they and their firms were prepared for it well before the lawsuit was filed.
Originally published in CPA Practice Management Forum - September 2013.
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