The times have changed dramatically for CPAs. No longer are there only purely traditional CPA firms providing accounting, attestation, and tax services. The major firms are well-run, widespread conglomerates performing investment advisory, wealth management, personal financial planning, mergers and acquisitions, divestiture, strategic planning, forensic, business risk management, brand and reputation, and other advisory services. Even smaller CPA firms perform variations of these services, often on a limited, “informal” basis. How has this expansion affected CPAs’; professionalism and legal liability? When do CPAs have a fiduciary duty, and how does that affect the delivery of these varied services?
Answering these questions begins with understanding the legal and accounting meaning of two comparable, but different terms—“fiduciary duty” and “due professional care”—and continues with determining how they pertain to a CPA’s legal liability to the client and the public related to delivery of services and responsibilities under the professional standards.
Defining the Terms
Fiduciary duty is a legal concept established by law, not by any accounting, auditing, or other related professional standard. Black’s Law Dictionary defines fiduciary duty as “a duty of utmost good faith, trust, confidence, and candor owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer’s client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another).”
A fiduciary is defined as “either one who owes another the duties of good faith, trust, confidence, and candor or one who must exercise a high standard of care in managing another’s money or property.”
It is important to understand that these are the legal definitions of the terms. They are not defined in authoritative accounting and auditing literature; they are defined in the law through a synthesis of legal decisions involving the obligations and duties of one party to another in certain specific circumstances, and are heavily based in the law and the facts and circumstances involved in the underlying litigation. In order to determine whether one party owes a fiduciary duty to another, courts will look to the nature of the relationship between the parties.
Although under some circumstances a fiduciary duty may be implied as a matter of law (e.g., between an attorney and a client), in others the court must make a determination based on the facts presented to it.
Due professional care.
“Due care,” as it is included in legal literature, is generally defined as follows:
Due care refers to the effort made by an ordinarily prudent or reasonable party to avoid harm to another, taking the circumstances into account. It refers to the level of judgment, care, prudence, determination, and activity that a person would reasonably be expected to do under particular circumstances. This standard is applied in a vast variety of contexts, whether the duty may be driving on the road or performing a background check. The precise definition is usually made on a case-by-case basis, judged upon the law and circumstances in each case. (http://bit.ly/37FBACI)
The accounting profession, however, has defined due care, in part, by referring to a paragraph in the 1878 legal treatise Cooley On Torts:
Every man who offers his service to another and is employed assumes the duty to exercise in the employment such skill as he possesses with reasonable care and diligence. In all these employments where peculiar skill is prerequisite, if one offers his service, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment, and, if his pretentions are unfounded, he commits a species of fraud upon every man who employs him in reliance on his public profession. But no man, whether skilled or unskilled, undertakes that the task he assumes shall be performed successfully, and without fault or error. He undertakes for good faith and integrity, but not for infallibility, and he is liable to his employer for negligence, bad faith, or dishonesty, but not for losses consequent upon pure errors of judgment.
The accounting profession’s definitions of due care or due professional care today are found in various standards and in the AICPA Code of Professional Conduct. The standards and the code are in one way or another included or incorporated into the regulations governing CPAs in all 55 jurisdictions that grant the CPA designation and the accompanying right to render attestation opinions on financial data.
The Code of Professional Conduct section 0.300.060.01 states the overall principle of due care:
A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
A fiduciary duty creates a dilemma whenever the standards require CPAs to be independent when providing a service to a client.
This statement of the overall principle is followed by references to the elements of due care, including competence, diligence in discharging responsibilities, compliance with the relevant professional standards, planning, and supervision. It also refers to “concern for the best interest of those for whom the services are performed, and consistent with the profession’s responsibility to the public” (emphasis added). The last part, relating to the responsibility to the public (also called the “public interest”), is important to an understanding of CPAs’ legal accountability when providing certain services.
The public interest.
The Code of Professional Conduct section 0.300.030.01 broadly defines the public interest as follows:
Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.
The code goes on to say that the acceptance of this responsibility to the public is a “distinguishing mark of a profession.” Furthermore, it defines the public as “clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce.”
This broad array of beneficiaries makes it clear that CPAs’ responsibility can, depending on the services rendered, go beyond that owed to a client. It is the adherence to this principle that has given rise to the appellation of “the most trusted professional.” This is the hallmark of the CPA profession; at its core is the concept of always placing adherence to the code, the professional standards, and the exercise of due care and reasonable judgment above commercial interests.
How the Terms Affect CPAs in Practice
As seen above, a fiduciary duty is in part defined as a “duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person.” This duty creates a dilemma whenever the standards require CPAs to be independent when providing a service to a client. Independence in providing attestation services is essential to the provision of an opinion on financial or other data. The requirement to be independent is not only embodied in the profession’s standards; it is also included in federal and state regulations concerning the issuance of attest reports on financial statements, including those filed with regulatory agencies such as the SEC and Department of Labor. Consequently, CPAs do not have a fiduciary duty to clients when rendering attestation opinions on those clients’ representations, as that would be incompatible with the obligation to maintain professional independence. In other words, as a fiduciary, a CPA would be required to place the client’s interests ahead of his own independence, which is not permissible under professional standards.
This principle was affirmed by the U.S. Supreme Court in U.S. vs. Arthur Young & Co. [465 U.S. 805 (1984)]. In that decision, the Court stated that: “An independent certified public accountant performs a different role from an attorney, whose duty, as his client’s confidential adviser and advocate, is to present the client’s case in the most favorable possible light. In certifying the public reports that depict a corporation’s financial status, the accountant performs a public responsibility transcending any employment relationship with the client, and owes allegiance to the corporation’s creditors and stockholders, as well as to the investing public.” By requiring that CPAs put the public interest ahead of the client, the Court essentially negated any basis for finding a fiduciary relationship between the entity being audited and the CPA auditing and reporting on that entity’s financial statements.
More recently, the Supreme Court of North Carolina reaffirmed the relationship between a client and its auditor, holding that, as either a matter of law or fact, there was no fiduciary relationship between an auditor and the entity being audited (CommScope Credit Union v. Butler & Burke, LLP, 2016 N.C. Lexis 812). The North Carolina Court referenced the Supreme Court decision in Young, stating, “The United States Supreme Court has recognized that independent auditors ‘assume … a public responsibility transcending any employment relationship with the client,’ and that they ‘owe … ultimate allegiance to the [client’s] creditors and stockholders, as well as to the investing public,’ rather than to the audit client” (emphasis in original).
The North Carolina court further stated: To protect the public’s confidence in the independence of independent auditors, this standard required not only that an auditor ‘be independent,’ but that the auditor also ‘be recognized as independent.’ … To be recognized as independent, an auditor had to ‘be free from any obligation to … the client, its management, or its owners.’ … So under AICPA standards, and thus under the terms of the audit engagement, defendant had to maintain its independence from plaintiff and be free from obligations to or bias about plaintiff. Defendant was required to consider the interests of third parties who might rely on the audit, and to further those interests, even though they could conflict with the interests of the audit client. By contrast, a fiduciary must act in the best interests of its principal. … Defendant’s commitment to audit plaintiff’s financial statements in accordance with GAAS thus did not create a ‘fiduciary relationship … in fact.’ … Nor does the complaint allege that defendant agreed to perform any additional services for plaintiff that could give rise to a fiduciary relationship in fact.”
Judicial decisions that attestation engagements do not give rise to a fiduciary duty to the client are extremely important for a CPA’s legal position if sued.
Other jurisdictions have similar rulings. For example, in Iacurci v. Sax [139 Conn. App. 386 (2012)], a Connecticut appellate court held that an accountant acting as a tax return preparer was not in a fiduciary relationship with the client. The court found that the long-term relationship between the parties and the CPA’s superior knowledge and skill on tax matters did not give rise to a fiduciary duty on the part of the CPA. The underlying facts and circumstances, however, will be a determining factor in each instance. Consequently, attestation engagements, where independence is a requirement (reference to “attestation” engagements or services herein is to those requiring independence), have been determined to not give rise to a fiduciary duty.
Judicial decisions that attestation engagements do not give rise to a fiduciary duty to the client are extremely important for a CPA’s legal position if sued. First, if a fiduciary duty exists in the relationship, the inquiry shifts from whether the CPA exercised due professional care to whether the CPA conducted the engagement in a way that furthered the client’s interests. Second, the breach of fiduciary duty allegation may, if proven, afford the plaintiff an opportunity to seek greater damages.
In any event, the absence of a judicially recognized fiduciary duty does not relieve CPAs of the obligation to exercise due care in providing any type of service to a client. CPAs are obligated to follow GAAS and all of the relevant professional standards when performing any professional services.
What Services Are Included in an Attestation Engagement?
Because the legal determination of whether there is a fiduciary duty can depend on the facts and circumstances involved, it is important to look closely at what a CPA did to support the attestation opinion. Clearly, any procedure based in complying with GAAS should not lead to a determination that the CPA was in a fiduciary relationship with the client. When performing attestation services, it may be necessary for CPAs to go beyond GAAS and perform other preliminary services, such as preparing a trial balance, recommending adjusting entries, reconciling account detail, and preparing the financial statement or presentation, so long as independence is maintained.
A reading of the two cases previously mentioned would lead to the conclusion that the need to be independent of the client to render the report is the critical factor when determining whether a fiduciary duty exists. Here is where the surrounding facts and circumstances come into play. CPAs must be independent of a client to issue the report; consequently, the facts surrounding the ancillary services performed need to be examined. If it is determined that the services were necessary to reach a final conclusion on the client’s financial statements or presentations, and the CPA was required to be independent under the standards when performing those services, then it would be reasonable to conclude that the CPA did not have a fiduciary duty to the client when performing those ancillary services.
During the performance of an audit, for example, a CPA may prepare a client’s trial balance or financial statements, reconcile the detail in some accounts to the general ledger, and recommend adjusting journal entries, including those related to accrual accounting. If a CPA follows the independence standards and as a result is considered independent under those standards, the services performed should not be considered separate from the overall deliverable of an opinion on the statements or data. They are part and parcel of the support for that opinion, and if the CPA is, as required, independent of the client, then as the U.S. Supreme Court stated, “the accountant performs a public responsibility transcending any employment relationship with the client.” In other words, the obligation to others negates the position that the CPA has a fiduciary duty to the client.
The exercise of due care in providing attest services permeates all of the standards related to the provision of those services, whether or not there exists a legal fiduciary duty relationship with one party or another.
While the facts and circumstances may indicate that the CPA’s services did not establish a fiduciary relationship with the client for legal purposes, there is no exemption for not following the relevant professional standards for the services provided by the CPA. The exercise of due care in providing attest services permeates all of the standards related to the provision of those services, whether or not there exists a legal fiduciary duty relationship with one party or another.
Putting the Public Interest First
The existence—or lack thereof—of a fiduciary duty in connection with a CPA’s potential liability when providing attest services does not affect a CPA’s obligations of due professional care under the AICPA code and relevant professional standards. When performing attestation services, there can be no fiduciary duty because of the requirement for the CPA to be independent of the client; however, the same due care and recognition of a duty to the public interest as described by the Supreme Court in Young remains regardless of the nature of the service being provided. The difference is in how the law and courts will evaluate the facts and the related damages if a CPA is sued based on perceived failures in performing an engagement.
Due care is a process and does not guarantee any particular end result. Nevertheless, CPAs need to apply reasonable judgment based on the surrounding facts and circumstances when designing and applying engagement procedures regardless of the service provided. When performing any professional service, as much as the client’s interest is important, the public interest is a primary consideration and a necessary ingredient in maintaining professionalism and protecting the stature of the CPA designation. In an attestation engagement, independence is a necessary condition for rendering a report and must be maintained both to conform to professional standards and to assure public confidence in the integrity of the CPA’s conclusion.