Most CPAs will never face the underbelly of an accounting malpractice lawsuit. Those who do, however, will say the challenges are something they never want to experience again in their lives.
A malpractice claim against a CPA (I will refer to as you) may arise from several causes such as a business failure, bad advice (primarily regarding tax) and fraud. Regardless, some critical decisions made early in the process can lower the cost and the angst, especially in time and frustration.
Assuming you have malpractice insurance coverage, the matter is not as simple as notifying the carrier, which is required by the policy. At first hint of the possibility of a lawsuit comes the time to thoroughly read and understand the policy. This is also the time to make at least one critical decision: Do I hire my own lawyer or simply rely on the lawyer the insurance company refers?
Allow me to answer the question by stating emphatically, “hire your own lawyer.”
Unfortunately this means you will have two lawyers, but huge benefits are derived. The malpractice insurance policy is a legal contract written by lawyers. In the contract the CPA has agreed to, many key provisions were most likely never considered. Some policies may differ, but you must review your policy to understand.
Motions, filings, pleadings, discovery, depositions and hearings in court consume an enormous amount of time, and the process moves at a snail’s pace. Until confronted with litigation, most people do not understand the costs and lack of control experienced. The early settlement of a case can seriously limit the cost and resultant fees, plus the headaches, frustration and diversion.
Bottom line, litigation in accounting malpractice is a legal minefield and a tough as nails battlefield. You will have to pay your own legal counsel. Is the cost worth it? I have served as an expert in over three dozen accounting malpractice cases. In my opinion, if you are represented by experienced independent legal counsel of your choosing, who can direct and oversee the whole process for your benefit, your savings will be substantial.