Avoiding Fiduciary Liability
Goldwasser, Dan L., The CPA Journal
CPAs have not traditionally been considered fiduciaries; however, as they broaden their consulting services, the chances of being held to the higher standards of a fiduciary also increase. In fact, recent changes in the law make it likely that most future malpractice cases against CPAs will include one or more claims for breach of fiduciary duty. This is significant because
* the statute of limitations for breach of fiduciary duty claims is generally longer than for professional malpractice claims; * the standards of liability for a breach of fiduciary duty are generally easier to satisfy than those for professional malpractice; and
* a breach of fiduciary duty often can be the basis for a punitive damage award. Who Is a Fiduciary?
Historically, a fiduciary was an individ ual (or trust company) vested with the power to manage the assets of another (e.g., executors and trustees). This hardly describes the role of a CPA, who, while performing attest services, is prohibited by independence standards from managing assets or operations. Over time, however, the courts have expanded the scope of who is a fiduciary. At first, they characterized persons holding a power of attorney as fiduciaries although such persons, unlike executors and trustees, do not hold legal title to assets. Thereafter, they included attorneys-at-law within the definition of fiduciaries when they handled transactions for their client. In such cases, the courts pointed to the special expertise possessed by the attorney and the client's necessity to rely upon the attorney's expertise. The next step came when the courts deemed attorneys as fiduciaries when they simply rendered advice without undertaking to assist the client in the conduct of a given transaction. Finally, the courts applied the fiduciary designation to other professionals that offer advice, such as accountants, engineers, and investment advisers. CPAs who advise their clients on a broad spectrum of matters are subject to a fiduciary relationship.
Nonetheless, not every professional adviser is a fiduciary; nor is every fiduciary likely to have a fiduciary relationship with respect to every piece of advice rendered. This raises the questions: When is an adviser a fiduciary? And, how can the CPA serving in an advisory capacity avoid being deemed a fiduciary?
The courts have generally ruled that not every professional who renders advice is a fiduciary. A fiduciary relationship requires a high level of trust and confidence between the client and the adviser. In addition, there must be a large disparity in relative levels of expertise so that the client is highly reliant on the professional's advice. Some courts have ruled that the adviser must have invited the client's reliance on his advice and fully understands that the client would rely upon it. At least one court has stated that, in a fiduciary relationship, the client must not have the ability to judge the appropriateness of the advice. This court went on to rule that a professional can avoid being held as a fiduciary by explaining the advice or by providing the client with information that would permit the client, with the professional's advice, to assess the risks entailed.
There can be no question that a CPA offering advisory services can be held to be a fiduciary. As a fiduciary, a CPA can be held liable not only for erroneous advice, but also for the failure to have offered advice within the scope of the fiduciary relationship. This makes it all the more imperative for CPAs to structure their advisory relationships to avoid the possibility of being deemed a fiduciary or to limit the scope of any such fiduciary relationship.
For the most part, there is little chance that a CPA will be deemed a fiduciary in most audit and tax preparation engagements. This does not mean, however, that there is no chance of incurring fiduciary liability. For example, a …
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Publication information: Article title: Avoiding Fiduciary Liability. Contributors: Goldwasser, Dan L. - Author. Magazine title: The CPA Journal. Volume: 72. Issue: 7 Publication date: July 2002. Page number: 64+. © New York State Society of Certified Public Accountants Feb 2009. Provided by ProQuest LLC. All Rights Reserved.