Liability Insurance Decisions And Premium Charges Among CPA Firms: An Empirical Analysis

Abstract

In 1993 accountants faced 5,000 liability suits in which judgments were sought exceeding $30 billion. In response to potential litigation, numerous CPA firms have purchased liability insurance for protection. AT present little is known about the types of firms that become insured, and factors influencing the sources from which insured firms buy their coverage. Results o this study indicate that insurance coverage is less likely among small firms and firms that provide data processing services, while tax firms are more likely to acquire coverage. Among firms that purchase insurance, premiums tend to be higher among older firms, partnerships, and firms providing data processing services. Provision of auditing or tax services tends to be associated with lower premiums, other factors held constant. We do not find evidence of self selection bias in the determination of premiums. Further results provide insight into choices among insured firms regarding the sources of coverage.