Auditing is delicate work where mistakes are costly. An incorrect audit opinion can influence the decisions of investors, banks and counterparties, and the client or third parties may bring large claims against the audit firm. Liability insurance helps a firm survive such a claim without a blow to its own capital.

What the law says

Auditing in Russia is governed by Federal Law No. 307-FZ of 30 December 2008 "On Auditing". Article 13 lists insurance among the rights of an audit firm and an individual auditor, namely insurance of:

  • liability for breach of an audit services contract;
  • liability for damage caused to other persons' property in the course of audit activity.

In other words, at the level of the law, insurance is voluntary. In practice, however, a requirement to hold a policy may come from other sources:

  • the terms of contracts with large clients, banks and investors;
  • the terms of tenders under Federal Laws No. 44-FZ and No. 223-FZ, where the customer may include an insurance requirement in the documentation;
  • internal requirements of the self-regulatory organisation of auditors and the audit firm's own standards.

Why insure if the law does not require it

An audit firm is liable to its client and third parties under the general rules of the Civil Code — whether or not it has a policy. A single large claim may exceed the annual revenue of a small audit firm. A policy turns an unpredictable risk into a clear annual expense and increases clients' trust.

What the policy covers

The object of insurance is the property interests of the audit firm related to its obligation to compensate the client's losses or harm to third parties. The insured event is, as a rule, a claim for compensation in connection with unintentional errors, omissions or negligence in providing audit and related services.

The policy usually covers:

  • amounts the audit firm must pay under a court decision or a settlement agreed with the insurer;
  • legal defence and expert examination costs;
  • costs of mitigating losses.

Typical exclusions

  • intentional acts, fraud, a knowingly false opinion;
  • fines and other sanctions imposed by government authorities;
  • claims known before the contract was concluded;
  • work without the necessary qualifications or outside the scope stated in the insurance contract;
  • claims by affiliated persons.

Key contract terms

Sum insured

Set by agreement of the parties. Benchmarks for the calculation are the audit firm's revenue, the size of its clients (especially public interest entities) and the requirements of contracts and tenders. You can set an aggregate limit for the period and a separate limit per claim.

Retroactive period

An error in an opinion may come to light several years later. A retroactive date makes it possible to cover claims for work performed before the policy started. The earlier it is, the broader the protection.

Extended reporting period

An additional period after the contract expires during which claims for errors made during the policy period can still be reported. It is useful if the firm ceases operations or changes insurer.

Deductible

Helps lower the policy price: the firm settles small claims itself.

What affects the price

  • the type and volume of services: statutory audit, voluntary audit, tax and management consulting;
  • the industry mix of clients — financial institutions and public companies increase the risk;
  • claims history and the results of external quality control;
  • the qualifications and experience of specialists and the internal control system;
  • the chosen sum insured, deductible and retroactive period.

How to arrange cover

The insurer will ask you to complete a proposal form: information about the firm, its revenue, the structure of services and clients, the number of auditors and claims in recent years. The rate is calculated from these data. Polis Re specialists will help prepare the form and request offers from several insurers.

Learn more in the Professional liability section. Company executives may need directors' and officers' liability insurance (D&O). Similar protection for notaries is covered in Notary liability insurance. To request a quote, use the request form.