Understanding An Outsourced Accountant's Legal Liabilities

Your actions as an accountant carry legal consequences, whether you work in public practice or as part of an outsourced accounting team serving local or foreign clients. Understanding your legal liabilities helps you keep your reputation intact and prevents you from facing unwanted charges. 

Here’s what you should know about it.

Legal liability refers to your responsibility under the law for harm or loss caused by your actions or inaction. As an accountant, your legal liabilities arise from the professional services you provide, the advice you give, and the financial information you prepare or audit. 

In this article, you’ll learn more about your: 

Part 1: General liabilities

A. Liabilities under the common law 

B. Liabilities under the statutory law

Part 2: Liabilities as an outsourced accountant 

Part 1: What are your legal liabilities as an accountant?

Accountants have a significant role not only in managing an organization’s finances but also in keeping an eye on any unethical practices.  

As guided by the Generally Accepted Accounting Principles (GAAP), it's your duty to ensure that your client is adhering to all applicable laws and regulations concerning the accounting practice. This requires you to do your work with due professional care and vigilance. 

Depending on your jurisdiction, you may be responsible for damages under the common law, statutory law, or both.

Common law generally covers liabilities arising from professional relationships and duties of care, while statutory law involves violations of written laws and regulations enacted by legislative bodies. 

If your failure to meet this obligation caused damage to your clients, third parties, or the government, you may have to face criminal or civil cases.

A. Liabilities under the common law

Common law refers to legal principles developed through court decisions rather than written statutes. In accounting, common-law liabilities usually involve claims brought by clients or third parties who allege that they suffered losses due to an accountant’s actions. 

The most common types of common law liabilities include negligence, gross negligence, breach of contract, and accounting fraud. 

1. Negligence

Negligence occurs when an accountant fails to exercise reasonable care and skill in performing professional duties, resulting in harm to another party. It is usually unintentional and arises from mistakes, oversight, or failure to follow established procedures. 

To prove negligence, the claimant typically must show that you meet these four elements: 

• A duty of care 

• A breach of that duty 

• The said breach caused harm 

• The harm resulted in measurable damages 

In practice, negligence often happens when you fail to perform your routine tasks properly. It can be when you make calculation errors, incorrect journal entries, missing disclosures, inaccurate tax returns, and failure to file required forms on time.

While these mistakes may seem minor, they can have serious consequences. An incorrect tax filing may result in penalties and interest for the client. Meanwhile, an error in financial statements may affect loan approvals or investor decisions. If the client can show that they relied on your work and suffered losses as a result, you may be held liable. 

To prevent this, you must be extra careful with everything you process, be it documentation, procedures, or quality control. 

Read Next: 7 Common Accounting Errors and How to Correct Them 

2. Gross negligence

Gross negligence is the deliberate act of disregarding professional duties and accounting standards. 

While negligence may arise from oversight (and is often accidental), gross negligence is intentional and is usually done with full awareness of the wrongdoing.

For example, if you fail to investigate clear signs of financial misstatement or ignore red flags during an audit, this may be considered gross negligence. This comes from the assumption that a competent professional would have recognized the risks and taken appropriate action.

Courts treat gross negligence more severely because it indicates a higher level of fault. In some jurisdictions, gross negligence may expose you to punitive damages or increased penalties.

Make sure to steer clear from gross negligence. It can be too risky because professional liability insurance may not fully cover claims involving reckless behavior. 

3. Breach of contract

Breach of contract happens when you fail to fulfill the obligations set out upon in your engagement letter or service agreement, and the client suffers losses as a result. 

Contracts between accountants and clients typically define the scope of services, responsibilities, timelines, fees, and limitations of liability. These agreements create both express and implied duties.

Express duties are those explicitly stated in the contract. Implied duties, on the other hand, include performing services with due care, competence, and professionalism.

A breach may occur if you fail to deliver agreed services, miss deadlines, or provide work that doesn’t meet the agreed standard. For instance, if your engagement includes preparing monthly financial statements and you consistently fail to deliver them on time, the client may claim breach of contract.

Clear and well-drafted engagement letters are essential for managing this type of liability. They help define expectations and reduce misunderstandings that can lead to disputes. 

4. Accounting fraud

Accounting fraud refers to the illegal and conscious act of falsifying financial statements to deceive investors and shareholders. Some examples of activities subject to fraud are misstatement of assets and liabilities, overstatement of revenues, and manipulation of financial records to mislead investors or lenders. 

Taking part in a fraud may subject you to both civil and criminal liabilities. Civil cases may involve claims for damages, while criminal cases may result in fines and imprisonment.

Note that even if you didn’t directly benefit from the fraudulent act, participating or turning a blind eye may still result in a liability. Failing to act when you’re aware of fraudulent activity won’t keep you safe. As an accountant, you’re expected to question unusual transactions and challenge information that appears inconsistent or misleading. 

5. Liability to third parties

Your legal duties aren’t only limited to your direct clients. Under common law, it also stretches to third parties who rely on your work.

Third parties may include investors, lenders, creditors, or business partners. If it is reasonably foreseeable that these parties would rely on your financial statements or audit reports, you may be held liable for losses they incur due to errors or misstatements.

The extent of third-party liability varies by jurisdiction. Some courts require a close relationship between the accountant and the third party, while others apply broader standards of foreseeability.

This risk is particularly relevant for accountants working on audits, financial statements for public companies, or reports used for financing or investment purposes. 

B. Liabilities under the statutory law

Statutory law consists of written laws enacted by legislative bodies. These laws often impose specific duties and penalties on accountants, particularly those involved with public companies or regulated industries.  

Violations of statutory law may result in fines, sanctions, or criminal prosecution, regardless of whether a client suffered direct losses.

Below are key statutory laws in the United States that accountants, especially CPAs, should be aware of. 

1. Securities Act of 1933

The Securities Act of 1933 regulates the offering and sale of securities to the public. Its primary objective is to ensure that investors receive accurate and complete information.

Companies offering securities for sale to investors to register with the Securities and Exchange Commission (SEC). As an accountant, it is your duty to audit financial statements with due diligence.

If financial statements contain material misstatements or omissions, you may be held liable under this Act. Liability may arise even if you didn’t intend to mislead investors, provided that due dilience was not exercised.

Violation of any of its provisions may subject you to up to $10,000 fines or up to five years of imprisonment, or both. 

2. Securities Exchange Act of 1934

This law requires SEC-registered companies to file annual audits and conduct quarterly reviews of financial statements.  

If your involved in such engagements, you must ensure that financial reports fairly present the company’s financial position while complying to applicable standards.

The usual claims associated with this Act are gross negligence and fraud. To avoid these, you must always make sure that you’re carrying out your tasks in good faith. Otherwise, violations of the Act may result in severe penalties, including fines of up to $25 million or up to 20 years of imprisonment, or both. 

3. Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act (PSLRA) was enacted to curb abusive securities lawsuits while strengthening audit requirements. 

Under this Act, auditors must include procedures designed to detect illegal acts and identify related party transactions. Auditors must also assess whether there is substantial doubt about the company’s ability to continue as a going concern for the next fiscal year. 

Your responsibility as an accountant is to report any illegal activities to the management and board of directors. If you fail to comply with these requirements, SEC may impose a financial penalty of up to $500,000 to your firm and require your firm to return any of the profits made from the audit. 

The list above only outlines the fundamental liabilities you must know about. It is in any way comprehensive given that each jurisdiction, industry, or professional organization can have their own rules and regulations. But at least it gives you a general sense of what you should watch out for. 

How about if you’re working as an employee of an outsourcing company? Let's move on to the second part of our discussion. 

Part 2: Legal liabilities in offshore accounting arrangements

Offshore outsourcing has become a common practice for accounting firms and finance teams seeking cost efficiency, scalability, and access to specialized talent. While offshore accountants perform many of the same technical tasks as onshore teams, their legal exposure and responsibilities are often misunderstood. 

As an offshore accountant, you’re not exempt from legal liability simply because you work outside the client’s home country. In many cases, your work still directly affects financial reporting, tax compliance, audits, and regulatory filings. This means errors, omissions, or misconduct can still result in serious consequences. 

Legal responsibility in an outsourced offshore accounting typically depends on three key factors: 

• The nature of the engagement 

• The governing law stated in the contract 
• The role of supervision and control 

In most offshore arrangements, the client retains the ultimate responsibility for compliance and reporting. However, this doesn’t mean you're free from liability. You may still be held liable under: 

• The laws of your home country 

• Contractual obligations outlined in the engagement agreement 
• Professional and ethical standards governing your practice 

There’s also high probability to face exposure under foreign laws, particularly when your work is used in regulated filings or public disclosures despite being an offshore accountant. 

1. Contractual liability of offshore accountants

Contracts play a central role in defining your legal responsibilities as an offshore accountant. Engagement letters, service agreements, and master service contracts usually specify: 

• Scope of services 

• Standards to be followed 

• Confidentiality and data protection requirements 

• Limitation of liability clauses 

• Governing law and dispute resolution 

If you fail to perform your agreed-upon duties, you may be liable for breach of contract (see discussion above). 

2. Negligence and professional standards in offshore work

As an offshore accountant, you’re generally expected to meet the same professional standards as onshore accountants when performing equivalent tasks.

This means even when you work under someone’s supervision, you must still exercise due professional care. If you’ve been negligent, and it contributed to financial misstatements or compliance failures, liability may extend to both your employer and the client, depending on the facts of the case. 

3. Cross-border liability and jurisdiction issues

One of the most complex aspects of offshore accounting is jurisdiction. Legal claims may arise in more than one country, depending on where the work was performed, where the client is located, and where the harm occurred. 

• Common jurisdictional questions include: 

• Which country’s laws apply 

• Where legal action may be filed 

• Which courts or arbitration bodies have authority 

Many offshore contracts specify governing law and dispute resolution mechanisms to reduce uncertainty. These clauses are critical, especially when working with foreign clients subject to strict regulatory oversight. 

Without clear jurisdiction of clauses, disputes can become costly and difficult to resolve. 

4. Regulatory expectations for offshore accountants

If you work with regulated entities, you will also need to comply with additional expectations, even if you’re not licensed in the client’s jurisdiction. 

For example: 

• If you support US public companies, you must follow US GAAP, PCAOB standards, and SEC requirements 

• If you work as a tax preparer on US returns, you must comply with IRS rules and confidentiality standards 

• If you provide audit support, you must follow applicable auditing standards and quality control procedures 

Regulators increasingly expect firms to maintain oversight and documentation of offshore work. Failure to supervise offshore teams properly may be viewed as a compliance failure. 

5. Data privacy and confidentiality risks

Your legal liability as an offshore accountant also extends to data protection and confidentiality since you’ll be processing sensitive financial data.

Improper handling of this data may violate local data protection laws, foreign privacy regulations, and contractual confidentiality clauses.

Breaches involving personal data of EU residents, for instance, may trigger obligations under the General Data Protection Regulation, even if you're based outside the EU. Such data privacy failures can also result in fines, lawsuits, and reputational damage. 

6. Fraud and ethical misconduct in offshore arrangements

Accounting fraud and ethical violations carry serious consequences regardless of where the work is performed. 

Similar to what we’ve discussed earlier, if you knowingly participate in falsifying records, concealing transactions, or misleading stakeholders, you may be subject to fraudulent cases, which include: 

• Criminal charges in your home country 

• Contract termination and civil liability 

• Professional sanctions 

• Potential exposure under foreign laws 

Even passive involvement or failure to escalate suspicious activity may create liability. Thus, you’re expected to follow ethical standards, and report concerns through appropriate channels as soon as possible. 

7. Shared liability between offshore and onshore teams

In many offshore arrangements, liability is shared between the offshore provider and the onshore firm. Common scenarios include: 

• Offshore errors not caught during onshore review 

• Inadequate training or supervision 

• Poor communication of accounting policies 

• Lack of documentation of review procedures 

Courts and regulators often examine whether the onshore firm exercised reasonable oversight. If not, liability may extend beyond the offshore team. 

This shared responsibility reinforces the importance of strong governance and review frameworks. 

Sticking to the accounting standards and keeping your “good faith” in performing your duties prevents you from incurring criminal and civil liabilities. Before signing your engagement letter, make sure you spend enough time assessing your legal responsibilities. 

Are you in need of additional people in your accounting firm? D&V Philippines guarantees that its accountants are well-versed in the accounting standards and practices in our clients’ jurisdictions. Contact us today for more information or get a copy of our whitepaper, D&V Philippines: Your Talent Sourcing Partner. 

This post was first published on 17 June 2021 and has been on 22 January 2026 for relevancy and comprehensiveness.

Edited and updated by: Mary Milorrie Campos