eeping client books is stressful enough without having to worry about getting sued if you make a mistake. That’s why having professional liability insurance is an essential coverage for today’s bookkeepers.
Profits, losses and taxes are a volatile combination in these litigious times. If you make a mistake on a client’s books and the business loses money, you may be at a high risk of getting sued. Likewise the outcome may be the same if you overstate profits, leading to a firm paying too much in taxes. The bookkeeping industry is highly regulated and runs on deadlines – if you fail to adhere to a key regulation or miss a filing date, you could face punishing litigation. Fortunately, you can avoid these risks by purchasing professional liability insurance. Professional liability lets you focus on what you do best: running a profitable bookkeeping business.
What Are Bookkeepers?
Bookkeepers are business professionals who document a firm’s daily financial transactions. Their goal is to produce an accurate picture of a company’s financial status at a specific point in time. Compared with accountants, a bookkeeper’s perspective is more micro-oriented, focusing on a company’s current financial status. Accountants use bookkeeping data to run macro analyses of a firm’s long-term prospects.
Bookkeepers commonly handle tasks such as:
- Documenting financial transactions
- Posting credits and debits
- Generating invoices
- Handling payroll
- Producing and balancing ledgers, accounts and subsidiaries
However, one might argue that bookkeepers’ most important task is to assure the financial viability of their client firms. By recording all transactions in the proper format, they help them to pay their bills and taxes on time and to avoid getting into disputes with clients, government regulators and tax authorities.
Beware the Risks
Because you’re dealing with client financial issues, making a bookkeeping mistake can subject you to legal liability. For example, if you cut a vendor check that ends up bouncing due to insufficient funds, you could be held personally liable to the payee. The only exception is if you can prove your company did not intend for you to have that authority. Another potential risk is not paying payroll taxes. For example, if your firm’s cash flow is tight and you decide to pay vendors with money you should have used for FICA, you will likely be held personally liable if:
- You have formal decision-making authority on vendor payments. In other words, you decide which bills to pay and in what amount.
- You purposely did not pay the taxes. Your boss or any entity requesting you not to pay them does not excuse your liability.
But those are just two potential risk minefields. There are many more, including:
- Not expensing an asset properly, which triggers asset depreciation errors and tax overpayment
- Mistakenly generating invoices and recording payments, leading to overstated income
- Missing a double posting because you failed to reconcile your accounts on a monthly basis, throwing off your tax calculations
- Not properly tracking account receivables, jeopardizing future payments from big customers
- Missing out on potential expense deductions for tax purposes because of sloppy bookkeeping
Introducing Professional Liability Insurance
Professional liability insurance mitigates the risks most bookkeepers face. It’s a type of insurance that covers the expenses of defending yourself against claims of professional negligence. It generates funds to hire a lawyer as well as to pay for financial judgments or settlements if you lose your case. Not only does this insurance shield your personal and business assets against client claims, it also pays attorneys to rid you of nuisance lawsuits.
How does professional liability insurance work? Put simply, it protects you when you make a mistake or forget to do something important, which financially injures a client. Based on your policy’s insuring clause, the insurer will:
- Provide you with an approved defense attorney at no expense to you
- Provide a claims adjuster to manage your case