5 Common E&O Claims Bookkeepers Face (And How to Avoid Them)
Even the most careful bookkeeper can make mistakes. Understanding the most common sources of E&O claims can help you implement safeguards to protect both your clients and your practice.
Here are the five most frequent claim types we see—and practical steps to minimize your risk.
1. Payroll Errors
The Risk: Payroll is one of the most time-sensitive and consequential tasks bookkeepers handle. Mistakes can include:
- Incorrect tax withholdings
- Late payroll tax deposits (941 penalties add up fast!)
- Misclassifying employees as contractors
- Errors in overtime calculations
- Failing to properly handle garnishments
Real Example: A bookkeeper filed quarterly payroll taxes one day late due to a calendar error. The resulting penalties and interest totaled $4,200. The client sued to recover these costs.
Prevention Tips:
- Use calendar alerts with multiple reminders for all deadlines
- Double-check withholding calculations, especially after tax law changes
- Implement a second-set-of-eyes review for payroll submissions
- Keep detailed documentation of all payroll activities
2. Missed Tax Deadlines
The Risk: Whether you prepare tax returns or simply provide data to CPAs, deadline failures can lead to costly claims:
- Late filing penalties
- Interest charges on amounts owed
- Loss of refunds (there's a statute of limitations)
- Revocation of S-Corp election
Real Example: A bookkeeper assumed a client's accountant was handling an extension filing. The accountant assumed the bookkeeper was doing it. Neither filed. The resulting penalties exceeded $8,000.
Prevention Tips:
- Maintain a master deadline calendar for all clients
- Send written confirmations about who is responsible for each filing
- Implement tickler systems with multiple warning dates
- Document all client communications about deadlines
3. Data Entry Mistakes
The Risk: A single transposition error can cascade through financial statements:
- Incorrect bank reconciliations
- Misstated accounts payable/receivable
- Wrong amounts on 1099s
- Errors that affect business decisions
Real Example: A bookkeeper transposed two digits when recording a large receivable. The business owner made expansion decisions based on incorrect cash flow projections. When the error was discovered, the client sued for the resulting business losses.
Prevention Tips:
- Implement regular reconciliation procedures
- Use accounting software with built-in validation
- Perform trend analysis to catch unusual variations
- Have a review process for significant transactions
4. Cyber Security Incidents
The Risk: Bookkeepers are increasingly targets for hackers because of the valuable data they possess:
- Phishing attacks leading to wire fraud
- Ransomware encrypting client files
- Data breaches exposing financial information
- Business email compromise schemes
Real Example: A bookkeeper fell victim to a spear-phishing email that appeared to be from a client requesting a wire transfer. $45,000 was sent to fraudsters before the scheme was discovered.
Prevention Tips:
- Implement multi-factor authentication everywhere
- Use encrypted file sharing (not email attachments)
- Verify wire transfer requests via phone callback
- Keep software updated and use reputable antivirus
- Regular cybersecurity training for all staff
5. Scope Creep and Unclear Expectations
The Risk: When the boundaries of your engagement aren't clear, you can be blamed for things that were never your responsibility:
- Client expected you to catch fraud (you're not an auditor)
- Client assumed you would file taxes (you only do bookkeeping)
- Client expected business advice beyond your expertise
- Unclear responsibility for backup and data retention
Real Example: A bookkeeper provided monthly financial statements. The client experienced embezzlement by an employee over 18 months. The client sued, claiming the bookkeeper should have detected the fraud. Defense costs alone exceeded $40,000.
Prevention Tips:
- Use detailed engagement letters specifying exactly what you will and won't do
- Explicitly disclaim fraud detection unless you're doing forensic work
- Review engagement letters annually and update as services change
- Get client sign-off on scope changes in writing
The Bottom Line: Insurance Is Your Safety Net
No matter how careful you are, claims can still happen. A disgruntled client, honest mistake, or unexpected circumstance can lead to allegations against your practice.
Professional liability insurance ensures that:
- You have expert legal defense when claims arise
- Your personal assets are protected
- Your business can survive a major claim
- You can focus on your work without constant fear
The cost of E&O insurance is a fraction of what a single claim could cost. Most bookkeepers pay $300-$800 per year—roughly the cost of one hour of legal defense if you had to pay out of pocket.