Pennsylvania CPA Journal
Private equity investment, mergers, and new federal reporting rules are reshaping how CPA firms operate and how risk is managed. For example, even when firms merge, legacy risk can follow.
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.
The accounting world is shifting fast. Private equity investment, mergers, and new federal reporting rules are reshaping how CPA firms operate and how risk is managed. Change, however, creates new exposures that may not be fully covered by older professional liability policies. For many CPA firms and individual practitioners, it may be time to check in to see if their liability limits still fit today’s environment.
The Consolidation Trend
Private equity firms have poured billions into the accounting profession since 2020, funding roll-ups and multistate networks. According to CPA Trendlines, more than 90 private-equity-related accounting deals have closed since 2020, representing around $200 billion in firm value.1 These deals promise growth, but they also introduce risk. When firms merge, legacy liabilities – such as old audits, tax advice, or client disputes – can follow the merged entity. Integrating systems, client lists, and quality controls takes time, and errors often surface during that process.
The Journal of Accountancy has documented cases where CPA firms faced new professional liability claims within a year of being acquired because old engagement files were incomplete or poorly transferred.2 The lesson is simple: consolidation amplifies exposure, and liability coverage must evolve along with firm structure.
Rising Regulatory Pressure
Regulators also have become more active. The Public Company Accounting Oversight Board (PCAOB) finalized 51 enforcement actions in 2024 – the highest number since 2017 – and imposed $35.7 million in total penalties.3 Its enforcement efforts focused heavily on audit quality and documentation issues, increasing the potential cost of claims for firms performing assurance work.
For tax professionals, the risk comes from changing IRS reporting rules. Updates to Form 1099-K thresholds and other reporting obligations have been delayed and revised several times.4 Each change creates uncertainty for both clients and preparers. When taxpayers receive conflicting information or unexpected forms, CPAs are often blamed for the confusion, even when the rules changed midyear.
Another major regulatory shift involves the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act. These rules began taking effect in 2024, but they have already been challenged and revised by federal courts and agencies. Firms that help clients interpret or file BOI information must document advice carefully.5 A misunderstanding or incorrect assumption about BOI obligations could lead to claims long after the work is complete.
Where CPA Claims Happen Most
Data from professional liability carriers show consistent patterns. Tax work generates the most frequent claims, often tied to missed deadlines, incorrect elections, or communication errors. Audit and assurance work, however, leads to the largest losses. One audit failure can easily exceed a firm’s per-claim limit. Even small firms that perform a few attest engagements each year face a potential “severity gap,” where a single large claim could exhaust coverage.
Firms should not rely on past experience alone when setting limits. What seemed adequate five years ago may not cover the size or complexity of today’s exposures.
Review Liability Limits Now
Inflation has contributed to rising defense costs and settlement values across all professional services. Mergers and acquisitions add another layer of complexity: successor liability. If a buyer’s insurance policy doesn’t align with the seller’s retroactive coverage dates or prior acts, legacy claims can slip through the cracks. In some deals, indemnification clauses cap the seller’s financial responsibility below realistic loss amounts. When that happens, the buyer’s policy and its limits become the fallback protection.
It is worth noting that underwriters now view CPA mergers as higher-risk transactions, especially when adding advisory or consulting services. Incomplete quality-control systems, limited peer reviews, or inconsistent documentation can all lead to higher claim frequency. Increasing liability limits before a merger can be an inexpensive way to safeguard against amplified exposures.
M&A Due Diligence Checklist
Insurance should be part of the due diligence process, not an afterthought. Both buyers and sellers should review the following:
- Policy Dates and Limits – Confirm retroactive dates, per-claim and aggregate limits, and whether prior acts are covered.
- Consent-to-Settle Clauses – Understand if your policy includes a “hammer clause” that could limit coverage if you refuse a settlement.
- Claim Definitions – Know what events must be reported and when notice must be given.
- Extended Reporting Period – Determine whether a tail policy or supplemental extended reporting period will be needed after closing.
Aligning these terms before closing avoids coverage gaps that can turn into costly disputes.
Choosing the Right Limit
Selecting the right liability limit starts with understanding your firm’s risk profile. Consider these factors:
- Service Mix – Audit-heavy firms need higher per-claim limits due to the potential severity of loss.
- Client Size – Larger or more complex clients create bigger exposure.
- Revenue and Growth – Fast-growing firms take on new risks faster than their insurance may reflect.
- Claim History – Past claim frequency helps predict future exposure.
- Transaction Plans – Firms involved in acquisitions should model both ongoing and legacy risks.
Run simple “what-if” scenarios. For example, estimate the cost of a major audit claim or a cluster of tax errors from one filing season. Compare these numbers to your current limit. If defense costs alone could consume a third of your coverage, your limits may need to increase. Many firms find that doubling coverage actually costs less than they expected relative to potential losses.
Tail Coverage/Individual Protection
After a merger or sale, claims can arise for work completed years earlier. Extended reporting period (ERP) coverage, often called “tail coverage,” protects against those delayed claims. If the buyer’s policy excludes prior acts, retiring partners or departing CPAs who leave public practice should consider an ERP to protect personal assets from old engagements.
The cost of an ERP is generally a percentage of an expiring premium and based on the number of years you select. An ERP can provide valuable peace of mind because, without it, even one unresolved client issue could become a personal liability. (See the fall 2024 Pennsylvania CPA Journal Liability Lessons column for more on tail coverage.)
Practices that Reduce Risk
Higher coverage limits should go hand in hand with stronger risk controls. A few of these controls could include the following:
- Require engagement letters for every service, updated annually.
- Add second-review procedures for high-risk tax positions or new clients.
- Maintain documentation that shows how advice was given and who approved it.
- Train staff to recognize when to report potential incidents early to your carrier.
- During mergers, conduct file audits to ensure consistent workpapers and documentation standards.
These steps not only lower claim frequency but also strengthen your defense if a claim is filed.
Forward-Looking Approach
Raising professional liability limits is not a sales decision; it is part of your strategic risk management. As the accounting profession consolidates and regulatory oversight expands, insurance policies must evolve alongside. Firms that regularly review their limits, model realistic exposure scenarios, and close coverage gaps will position themselves to survive mistakes or disputes that might otherwise be catastrophic.
1 “Dealflow Timeline 2020–2025: Private Equity Investments in CPA and Accounting Firms,” CPA Trendlines Research.
2 “Professional Liability Risk Stemming from CPA Firm Acquisitions – Part 2,” Journal of Accountancy (Aug. 2025).
3 PCAOB Enforcement Activity – 2024 Year in Review, Cornerstone Research.
4 Form 1099-K Reporting Fact Sheets, IRS Newsroom.
5 Beneficial Ownership Information Reporting Requirements, FinCEN (2024) and subsequent federal updates.
Irene M. Walton is area vice president, affinity manager, with Gallagher Affinity in Mount Laurel, N.J. She can be reached at irene_walton@ajg.com.