Should Small Firms Carry Malpractice Insurance?
Author | McFadden, John |
Sole practitioners and small CPA firms often have close business relationships with their clients--the result of years of individualized service and attention. Practitioners generally assume these longstanding relationships are risk free and that any problems can be resolved quickly and without confrontation. Therefore, they don't feel the need for professional liability insurance. Unfortunately, there rarely is a "problem-free" client. Consider the following case and point:
The Case: A sole practitioner developed a practice by providing personal and business tax, bookkeeping and compilation services to a variety of small business clients. As the practice matured, he hired his daughter as well as a recent accounting graduate, both CPAs. It wasn't long before the two employees were providing services to most of the practitioner's clients. At the time, the firm was grossing $230,000 annually.
One of the firm's tax clients was a family-owned manufacturer with approximately $3 million in sales. The company had been in business for 40 years and a client of the CPA firm for 8 years.
Three years after the two younger CPAs had been brought into the firm, the manufacturing company's tax returns for the prior two years, including form 5500 C/R, were audited by the IRS. The form 5500 C/R was for a pension plan set up by a benefits consulting company several years before the CPA firm was initially engaged to provide tax services.
As a result of the audit, the IRS determined the plan was top-heavy and that prohibited party-in-interest transactions had been made. The IRS felt the transactions jeopardized the plan's viability. It assessed substantial penalties against the manufacturer and was considering disqualifying the plan.
At the same time, the company felt it had an obligation to provide for two long-time employees who had been scheduled to retire shortly after the audit.
The CPA firm owner--who previously had established a strong relationship with the client--tried to resolve the situation. But the company president was extremely...
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