Accountant's liability definition

What is Accountant’s Liability?

An accountant's liability is the potential legal risk that an auditor bears for not spotting misstatements in a client's financial statements. If the auditor does not spot these misstatements and the financials are then sent out to users with a clean audit opinion, the auditor is liable for losses suffered by the users. These losses could be substantial, since a lender might lend funds based on the clean opinion, and investors may buy a company's stock for the same reason - and then lose their money when the company fails. The presence of this liability forces auditors to be unusually thorough in examining the books of their clients.

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Accountant Professional Liability Insurance

Auditors pay for professional liability insurance coverage to protect themselves from lawsuits relating to their work. This coverage pays for legal defense costs, as well as some or all of any eventual payout made to the plaintiffs.

The cost of this insurance can be significant, so the added cost can drive up the fees that auditors must charge to their clients.

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