Among the many roles and responsibilities assumed by accountants,
perhaps none is more critical or scrutinized than that of fiduciary. A
fiduciary, by definition, is a person or group who holds assets for
another party, often with the legal authority and duty to make decisions
for the other party. Given this important accountability, a fiduciary
is a person in whom someone has placed the utmost trust and confidence.
The concept comes from Roman law, and the word comes from the Latin fiducia,
meaning "trust." The fiduciary acts for the benefit of another and
should treat the other party's interests as paramount, while acting with
a high degree of good faith consistent with their duty of loyalty.
also have a duty of care and have to exercise the skill and care of a
reasonably prudent person. They often take legal title to assets but not
equitable title, which rests with the beneficiaries or principals. That
being the case, they are in a special and unique position of trust and
are held to the highest of standards.
Revered former U.S.
Supreme Court Justice Benjamin Cardozo, while he was a Justice on New
York's highest court, once wrote: "Many forms of conduct permissible in a
workaday world for those acting at arm's length, are forbidden to those
bound by fiduciary ties. A trustee is held to something stricter than
the morals of the marketplace. Not honesty alone, but the punctilio of
an honor the most sensitive, is then the standard of behavior. As to
this there has developed a tradition that is unbending and inveterate.
Uncompromising rigidity has been the attitude of the courts of equity
when petitioned to undermine the rule of undivided loyalty by the
'disintegrating erosion' of particular exceptions. Only thus has the
level of conduct for fiduciaries been kept at a higher level than that
trodden by the crowd."1
Accountants often find
themselves in the role of fiduciary, sometimes by choice and sometimes
by circumstance. As such, they need to appreciate the expectations and
the risks that come with this highly scrutinized task, and know how to
avoid certain risks.
The Risks of Responsibility
traditional accountant-client relationship usually is not fiduciary in
nature, especially if independence is required. However, certain roles
that accountants fill are universally regarded as fiduciary in nature,
- Executor or personal representative of an estate;
- Bankruptcy trustee or receiver;
- Investment adviser;2
- ERISA employee benefit plan fiduciary;3
- Attorney in fact (holder of power of attorney for taxes,
- financial matters or health care).4
accountants perform these duties, acting as fiduciaries, their actions
are dissected and analyzed more closely than normal. The law also treats
fiduciaries differently. For example:
- The statutes of limitations are often longer as compared with ordinary negligence statutes of limitations;
- Expert testimony may not be required to show liability as in ordinary negligence cases; and
defense of contributory or comparative negligence of the plaintiff is
not available as is usually the case in negligence actions.
a result, the burden of proof may shift to the fiduciary defendant to
demonstrate that his or her acts were consistent with their fiduciary
duties. Empirical evidence also suggests the possibility of punitive
damages being awarded against fiduciaries is greater; it's difficult for
any actual or perceived conflicts of interest to be effectively waived;
and the disgorgement of fees and profits is easier for claimants to
sometimes will be deemed to be in a fiduciary relationship with their
clients in other engagements, even though they have not accepted the
role of fiduciary. There are no bright-line rules as to when a court
might determine that a fiduciary relationship exists.
courts have found the existence of a fiduciary relationship where there
was a justifiably high level of trust and confidence in the
professional, usually caused by a large disparity in levels of expertise
between the parties as to the matter at issue. The plaintiff—who has
the duty to establish that the defendant assumed the role of
fiduciary—may do so by demonstrating the professional has made
representations, either directly, on a website or in marketing
materials, that he or she is an expert in a particular field.
factors that have been determinative in establishing a fiduciary
relationship are the existence of a lengthy business relationship, the
existence of a personal friendship between the parties, or the fact that
the professional encouraged reliance. For example, in the 1988 case Dominguez v. Brackey Enterprises,5CPA
Joe Dominguez was engaged to prepare tax returns, provide advice
regarding tax implications of investments, counsel the client regarding
investments and provide management advisory services. The Brackeys
invested money in a seafood business based, at least partly, on
Dominguez' recommendation and suffered a loss. The court found the
existence of a fiduciary duty in their relationship based on their long
business relationship, personal friendship and the fact that the
Brackeys were accustomed to being guided by Dominguez and were justified
in placing confidence in the belief that he would act in their best
Interestingly, as early as 1945, a court held that an
accountant who provided audit, accounting and tax services to the
plaintiff had and breached a fiduciary duty. In Cafritz v. Corporation Audit Company,6
CPA Barney Robins provided tax and audit services to a company owned by
Morris Cafritz. One of Robins' services was to deposit checks made
payable to the client company into the client's bank account. The
checks, entrusted to Robins, were never deposited into the client's
account. Robins died shortly thereafter, and the evidence indicated that
he had deposited some or all of the checks into an account of a company
that he controlled, thereby converting the money to his own use. The
court found that because Robins had occupied a position of trust and
confidence based on superior knowledge, a fiduciary duty existed.
another case decided more than a half century later, an allegation that
an auditor used confidential information gained during the course of an
audit to engage in unfair competition with the client was found to
sufficiently state a cause of action for breach of fiduciary duty.7
may avoid becoming a fiduciary unknowingly and steer clear of
associated liability by pursuing a few simple steps. An accountant
- Ensure that conflicts of interest are
disclosed fully and, with the assistance of legal counsel, obtain a
waiver from the client. This will help to educate the client and
document limitations regarding the accountant's role.
annual signed engagement letters specifically defining the scope of
services, including appropriate caveats and disclaimers. Also, in
certain instances, consider specifically stating what services will not
be rendered. And avoid language that may imply a fiduciary role.
- Document information that demonstrates the
client's knowledge and sophistication regarding the issues involved in
the engagement. This will tend to negate the dominance and dependency
that usually are required for a fiduciary relationship to exist.
- Observe the formalities of a professional relationship even though the clients may be familiar.
engage in acts that compromise independence, if the engagement requires
independence, or act in ways that are inconsistent with their role.
Effectively Discharging Fiduciary Duties
fiduciary will be held to the highest standard that exists under the
law, and each decision that is made will be scrutinized closely.
Therefore, the fiduciary should always send a confirming e-mail or
letter after an oral discussion. The professional will be expected to
explain what happened and why certain decisions were made, oftentimes
years after the fact. Thus, it would also be helpful to draft memoranda
to the file explaining the thought process behind more important
decisions that were made in the course of the engagement.
case that illustrates these ideas, an accountant provided tax services
for a wealthy client and was the trustee of her living trust. The will
and trust provided that one of the two daughters was to inherit the
entirety of the client's estate. That being the case, the accountant
trustee was lax in his duties and allowed the favored daughter to
dissipate trust assets before the mother's death and did not document
communications between them. After the mother's death, the other
daughter challenged the will and trust saying that, in exchange for
certain consideration, the mother had promised to treat the daughters
equally in the will and trust. She brought suit against the estate, the
favored daughter and the accountant alleging that the accountant had
breached his fiduciary duty as trustee. It was challenging to recreate
what transpired during the time in question and the accountant's actions
were difficult to defend. This caused him to appear less than
professional and created legal exposure. These issues, and other
factors, prompted a settlement of the case.
The most common
situation that produces claims and lawsuits against an accountant
trustee is when the accountant is a co-trustee with an heir/beneficiary
of the estate and a dispute arises with a sibling beneficiary about the
distribution of assets. The sibling typically alleges that the
accountant trustee is the non-conflicted trustee and, as such, has a
duty to be a "watchdog" over the co-trustee and the trust assets and
should closely monitor the acts of the other trustee, especially if they
involve decisions that may benefit the co-trustee beneficiary. These
cases are sometimes difficult to defend given the heightened standard of
care of a fiduciary. They are also expensive to defend given the
emotions that exist between family members as litigation decisions often
are made more on an emotional level than on a rational level.
agreeing to serve as a fiduciary, it is important to observe the
formalities of a professional relationship while documenting every
communication of substance. By not compromising independence, disclosing
all conflicts, issuing thorough engagement letters and documenting the
client's involvement, accountants can help avoid unwittingly becoming a
fiduciary, while discharging the critical duties they accept in a manner
that mitigates liability.
Of course, even the most diligent
accountant cannot eliminate all risk exposures. So, understanding the
scope of liability coverage is important. Accountants' professional
liability policies may limit or exclude coverage for certain services or
resultant damages where a fiduciary relationship is established.
Accountants should consult with their insurance agents or brokers
regarding coverage for any services they may be rendering.
are held to the highest standard under the law. Accountants can either
assume fiduciary responsibilities knowingly and voluntarily, such as in
the cases of a trustee or executor engagement, or the law will consider
them to be fiduciaries because of their position and relationship with
- Fiduciaries have greater exposure due to
increased scrutiny, longer statutes of limitations and increased
potential for punitive damages and disgorgement of fees. Also, expert
testimony is often not needed to establish liability, the defense of
comparative negligence is not available and the burden of proof will be
on the fiduciary to show that their acts were appropriate.
avoid unknowingly becoming a fiduciary, clearly define the scope of
your engagement in an annual engagement letter; disclose and obtain a
waiver for any conflicts of interest; document the client's knowledge
and sophistication of the issue; and, if the engagement requires
independence, do not engage in acts that are inconsistent with that
- To effectively discharge the duties of a fiduciary,
it is important to diligently document and confirm conversations with
the client or beneficiaries. Memoranda to the file will help the
accountant document the thought process underlying more important or
By CNA Accountants Professional Liability Risk Control, CNA, 333 South Wabash Avenue, 39S, Chicago, IL 60604.
1 Meinhard v. Salmon, 249 N.Y. 458, 464 (1928)
The Dodd-Frank Wall Street Reform and Consumer Protection Act recently
signed into law authorized the SEC to conduct a study that would allow
it to impose a fiduciary standard on broker-dealers as well. The study
was released in January 2011 and recommended a uniform fiduciary
standard for brokers, dealers and investment advisers.
Fiduciary responsibilities under the Employee Retirement Income
Security Act of 1974 (ERISA) are defined by this statute and related
federal laws, and are subject to regulations and guidance issued by the
U.S. Department of Labor. Related information is available at
Department of Labor has recently proposed expanding the definition of
"fiduciary" within the meaning of Section 3(21) of ERISA as it relates
to persons rendering investment advice to a plan for a fee or other
4 In certain instances, the accountant
is the most trusted person in the life of an elderly client. Thus, the
client will sometimes grant a durable health care power of attorney to
the accountant to make future health related decisions for the client if
the client becomes too ill or is otherwise unable to make those
5 756 S.W.2d 788 (Tex. App. 1988)
6 60 F. Supp. 627 (1945)
7 Stern Stewart & Co. v. KPMG Peat Marwick, LLP, 1997 N.Y. Misc. LEXIS 737, 218 N.Y.L.J. 17 (1997)
purpose of this article is to provide information, rather than advice
or opinion. It is accurate to the best of the author's knowledge as of
the date of the article.
Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional.
the extent this article contains any examples, please note that they
are for illustrative purposes only and any similarity to actual
individuals, entities, places or situations is unintentional and purely
coincidental. In addition, any examples are not intended to establish
any standards of care, to serve as legal advice appropriate for any
particular factual situations.
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