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Risk Control in Tough Economic Times - Space Sharing Tips

One way that accountants may try to adapt to current economic challenges is to share space with other accountants (or non-accountants). Such arrangements allow accountants to share expenses and overhead costs and consolidate the use of equipment and even human resources. But they also raise the risk that those accountants will generate new exposure to professional liability as well.

In particular, depending upon interactions with their clients and each other, accountants sharing space can create an apparent partnership that may, in turn, place them at risk to be found vicariously liable for their officemates’ torts. Vicarious liability is a tort doctrine which imposes responsibility on one party for the negligent acts or omissions of another. If the circumstances in which a client interacts with an accountant reasonably lead the client to believe – or suggest to a court that the client could believe – that the representation was provided by a partnership of accountants, the collection of accountants ultimately could be held liable for one another’s professional torts, whether or not they are a legal partnership. Accountants in such “de facto” partnerships (also known as apparent partnerships or partnerships by estoppel) are subject to claims of vicarious liability just like those in formally constituted partnerships.

Factors considered in determining whether a partnership by estoppel has arisen include how the group of accountants hold themselves out to the public in general and to the individual client in particular; how well the group maintains their separateness vis-à-vis one another; and generally, what efforts they make to avoid confusion about their relationship.

The following tips can help accountants sharing space minimize some of these risks:

  1. Do not share confidential client information with officemates who are not part of the firm.Generally, under Rule 301 of the AICPA Code of Professional Conduct,only CPAs in the same firm have an ethical right to share information without the specific consent of the client. Additionally, sharing such information this way, even with the client’s consent, can create the appearance of functioning as one accounting firm. This can lead to the waiver of tax advisor privilege under IRC §7525 as well as breach of fiduciary duty claims, ethical complaints, or claims of other legal violations.
     
  2. Invoke policies – for everyone in the space – that aim to prevent them from discussing confidential information in open areas or leaving client material in a common space. Files should be stored in a secure location to prevent unauthorized access to confidential information. 
     
  3. Do not share software applications with officemates. In addition to potentially violating software licensing agreements, if the officemate is sued, their data files are subject to discovery, which may expose confidential client information. 
     
  4. Avoid having officemates take messages or convey information to clients or third parties on behalf of clients. Use e-mail, voice mail and answering machines for this purpose, and ensure that all messages clearly inform callers of each person’s availability to respond to phone calls or e-mail messages. If the use of a receptionist is shared with officemates, ask the receptionist to forward all client calls to the proper party’s voice mail, or provide a cell phone number for clients to call in the event of an emergency.
     
  5. Get client consent before outsourcing services to an officemate. Comply with applicable professional standards on outsourcing, such as Ethics Ruling No. 112 under Rule 102 of the AICPA Code of Professional Conduct.
     
  6. Take steps to minimize the risk that clients will perceive a professional affiliation with officemates by maintaining separate letterheads and door signs for each entity in the office space. Be especially cautious when the firms share common clients. Explain to clients that the activities of officemates are not being supervised. If a referral is provided to or accepted from an officemate, issue a referral or engagement letter to the client, disclaiming responsibility for supervision in the event of a referral.
     
  7. Investigate applicable regulations and ethics rulings issued by state boards of accountancy, bar associations, and any other applicable regulatory boards or professional associations. Some have rules specific to space sharing arrangements.
     
  8. Investigate to determine that prospective officemates have no disciplinary problems, maintain current licenses as applicable, are financially sound, and are likely to adhere to good office procedures and practices.
     
  9. Consider the integrity of officemates.  Be cautious of others attempting to trade on the name or proximity of the existing firm.
     
  10. Review ethics rules applicable to fee sharing, and set appropriate policies for all parties in the space.
     
  11. Document each office sharing arrangement in a detailed written agreement, even if the arrangement may be short-lived.
     
  12. Consult with the firm insurance agent or broker regarding the application of existing insurance policies, and request evidence of professional liability insurance from officemates as a condition of the written office sharing agreement.

It is appropriate to seek creative ways to weather the economic storms. Space-sharing can help firms navigate financial challenges and provide camaraderie and emotional support, especially important in these times. Remaining vigilant to the risks presented by such arrangements can help maximize these benefits.

For more detailed discussion of the risks and benefits of professional space-sharing and advice on how to best address them, try the following:

Accountants Professional Liability Risk Control, CNA, 333 South Wabash Avenue, 39S, Chicago, IL 60604.

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May 2010

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