When accountants provide multiple services for a married couple, they need to keep in mind the rights and obligations of each client individually, as well as the couple as an entity, according to Ralph Picardi, a former CPA and an attorney who specializes in advising and representing CPAs on liability issues.
Picardi posits an example: “You have a long-standing client relationship with Jane, a successful business owner. She owns several businesses, all of them profitable, and over the years you have worked closely with her to provide multiple services to those businesses, including tax compliance, attest, and a broad range of consulting services. She is one of your best clients, and the revenues from her accounts factor heavily into your annual allocation of firm profits. Oh, and you also prepare a joint 1040 annually for Jane and … what’s his name again?”
The story continues, said Picardi, when you receive a phone call from Jane telling you that she is getting a divorce from “what’s his name.” Jane gives explicit instructions not to share with her soon-to-be-ex any of the information you have in your files. “A few days later, you receive a call from John, identifying himself as Jane’s husband. You realize that you have never met him, spoken to him, or corresponded directly with him in any manner. All of your communications and correspondence concerning the joint 1040 services you have rendered to the couple have been with Jane.”
“John confirms that he and Jane are separated and heading toward a divorce,” said Picardi. “He also asks you for a copy of the couple’s income tax returns and supporting documentation for the past 10 years, as well as the same information relative to Jane’s businesses.”
“At this point, you realize that you are likely in the middle of a hornet’s nest without a clear path to safety,” Picardi said.
DON’T PLAY FAVORITES
The good news is that there are a few basic principles that can guide you as you seek to answer these questions, according to Picardi.
To begin the analysis, it is necessary to draw a clear distinction between the work you have done for the couple and the work you have done for Jane’s businesses, he explained.
“With respect to the joint 1040s you have prepared for the couple over the years, the couple is your client, and each spouse is an equal and authorized representative of the client,” he said. “Insofar as the joint 1040 services are concerned, you are not permitted to favor one spouse over the other, or keep secrets from one spouse at the request of the other. This principle can sometimes confuse or even anger one of the spouses, particularly when that spouse is the principal income-earner and has been your exclusive point of contact with the couple,” he said. For this reason, Picardi recommends that tax preparers include language in their engagement letters explaining “in some detail” the nature of their relationship with the spouses.
The prohibition against playing favorites and keeping secrets from one spouse or the other does not, however, generally extend to separate business entities for which you perform services and in which only one of the spouses has an ownership interest, Picardi noted. “In such cases, your client is the corporation, the LLC or the LLP, for example. You are only permitted to disclose information regarding that separate business entity to or with the consent of the person or persons designated by the entity to communicate with you,” he said. “You should not automatically consider the non-owner spouse to be the equivalent of, or the agent of, the owner-spouse for purposes of communications concerning the entity’s affairs.”
However, Picardi added, “In community property states, these basic principles may have been modified somewhat. In a community property state, before telling John he cannot have access to files relating to Jane’s businesses in absolute terms, it would be advisable to consult local counsel.”
DIVIDING THE FILES
What records does a client have the right to request? Basically, a client is entitled to request and receive any original records they have provided that are within your files, Picardi indicated. Likewise, they are entitled to documents that have been prepared as part of your work papers, but which would likely be considered client records, such as a depreciation schedule. “This would include correspondence and other documents received from third parties in your capacity as the client’s agent, as well as the return you prepared. The remainder of your engagement file is generally considered your exclusive property, which the client has no rights to other than the expectation that it will be kept confidential.”
The principles to consider in a divorce situation can equally be applied to a partnership, or any situation where there are multiple owners of an entity and you tend to deal with one of them on a regular basis, according to Roger Harris, president of Padgett Business Services. “Once they have a dispute, or an unfriendly breakup, and their attorneys start to ask for information, you’re caught in the middle. At that point it’s a no-win situation.”
“In nearly every case, you are going to make one or both of them mad, so you need to do what the law requires you to do and protect yourself,” he said. “It’s impossible to make both happy when they’re telling you to do opposite things.”
“It’s a question of who you actually represent,” Harris observed. “At the end of the day, one of the parties can get a subpoena and you will have to comply. If they are entitled to it they will eventually get access to it. The trick is to get out of the situation and not be liable for anything you’ve done.”
“The AICPA’s Forensic & Valuation Services Practice Aid: A CPA’s Guide to Family Law Services describes divorce as ‘the financial division of assets that can be exacerbated by emotional issues, sometimes including child custody,’” observed Rickard Jorgensen, president of Jorgensen & Co., a broker and managing general underwriter specializing in professional liability insurance. “This is a good point to start from, as ‘exacerbated by emotional issues’ is the key phrase where malpractice issues are concerned,” he said.
“We’ve seen several claims arising from nasty divorces,” Jorgensen said. “Although claims from this area are relatively few, the damages can be substantial, especially when it’s a high-profile or ‘power couple’ and the marital assets are significant. In addition, we have received many requests for assistance when a CPA receives a subpoena for documents or testimony in connection with divorces. If a CPA receives a subpoena, he or she should immediately consult with their insurer’s pre-claims assistance hotline and possibly ask for assignment of local counsel. In certain instances, this may be grounds for a notification of a potential claim.”
“Often, divorce-related claims arise from dissatisfaction with the valuation of marital assets, or in extreme cases, allegations that the CPA has helped a spouse hide assets,” he said. “If the CPA had been engaged jointly by the couple in the past, choosing which person to represent can be as bad as which group of friends you side with. A CPA must always be impartial and cooperate with reasonable requests, but if hired to work with one of the parties, the CPA must disengage from the other to avoid accusations of a conflict. There are cases where a court may recommend hiring a single, neutral CPA, but this assumes that there have been no past services to either party, and this should only be undertaken if the divorce is cooperative.”
Because of the emotional issues, Jorgensen observed, the provision of services during a divorce should be approached cautiously and with the appropriate safeguards, including a well-worded engagement letter.
“The good news is that, if the client is dissatisfied with the services provided by the CPA and ultimately brings suit, this type of engagement is not usually excluded by most accountants’ professional liability insurance policies, and subject to the specific circumstances of the claim, coverage should be provided,” he said.