by Jason Subbie. VP & Senior Underwriter at CPAGold™
In the usual course of routine professional services (i.e. compiling financial statements, or preparing tax returns) an accountant does not owe a client a fiduciary duty. Additionally, auditors, especially those whose work benefits the public, require a degree of independence that conflicts with the nature of a fiduciary relationship. See Commscope Credit Union v. Butler & Burke, NO. COA14-273, 2014 N.C. App. LEXIS 1131 (N.C. App. Nov. 4, 2014).
A fiduciary is defined as a person who acts with the utmost fidelity for the benefit of another person on all matters within the scope of their relationship, and owes to another the duties of good faith, trust, confidence, and candor. A fiduciary must also exercise a high standard of care in managing another’s money or property. Certain relationships give rise to fiduciary duties as a matter of law, including: attorney-client, trustee-beneficiary, and guardian-ward relationships. Additionally, corporate directors and officers owe fiduciary duties to the corporation, and general partners are fiduciaries with respect to one another.
Recently, some courts have determined that accountants can serve as fiduciaries when providing certain professional services including: tax advice, asset management, and general business consulting. These courts have concluded that a fiduciary relationship may exist if: 1) the accountant presents themselves as an expert in an aspect of business where a fiduciary duty would normally exist, 2) the accountant establishes a high degree of trust and confidence in the client, and (3) the client relies upon the accountant’s advice. The AICPA has also affirmed that professional standards and ethics rules impose duties on CPAs that are consistent with expectations inherent in a fiduciary relationship.
This month (June 2017) the new Department of Labor fiduciary rules take effect and will impact all investment advisors, third party service providers to investment professionals, ERISA plans and other benefit plans, and accountants that provide investment advisory services. In instances where the existence of a fiduciary relationship cannot be established as a matter of law, it becomes a question of fact; and if the relationship is established the accountant will likely be exposed to liability and punitive damages claims for breach of fiduciary duty. Making matters worse, is that some courts have held that even carefully crafted engagement letters are not always successful at limiting punitive damages if a fiduciary relationship is established. A good legal resource is the website: http://www.dolfiduciaryrule.com/.
Although this date has been extended for 90 days it seems likely that there will be little change to the rules as previously established.
Despite all the doom and gloom these developments seemingly convey, there are ways to help accountants mitigate the risk of claims arising from a breach of an implied fiduciary duty. For instance, while engagement letters are not always a sure fire way to insulate a firm from a potential claim, narrowly construed letters clearly establishing the scope of the services being provided can serve as a strong affirmative defense. Many experts recommend avoiding terms like “adviser,” or “advisory services” if you don’t intend to offer these services.
If services or advice are provided, experts advise that any recommendations made to the client be supported with documentation of “informed consent” in order to reduce risk (i.e. specific language that all such recommendations require the client to consider all the information presented and then independently come to a decision, by either accepting and acting upon it, or rejecting it).
An appropriately experienced attorney can provide guidance on the drafting of specific engagement letter wording to limit exposure for fiduciary liability claims. Also, many insurance carriers provide engagement letter review services (mostly free, but some for an additional fee). Regardless of which method a firm elects to pursue, taking proactive measures (even seemingly insignificant ones) could make the difference between an insignificant and monumental loss.