As any experienced doctor or lawyer may tell you, occasional malpractice claims are inevitable by-products of a busy and long-lasting practice.

Many accountants, on the other hand, will proudly affirm that they have sustained long, rewarding careers without being sued. The recession, in exposing Ponzi schemes and other instances of misconduct, coupled with memories of Enron, has cast a spotlight - or, depending on who's doing the talking, a shadow - on the actions of accounting firms. As such, the paradigm has changed. Accountants are under more scrutiny by their clients than ever before. This scrutiny often translates into mistrust and accusation, which in turn translate into lawsuits.

My evidence for this is simply the increase in malpractice cases landing on my desk that don't feature doctors or lawyers as defendants, but rather accounting firms - large and small. And like any evolving area of litigation, lawyers for the claimants will unearth a host of innovative ways in which to plead a case. Some old avenues of attack are modified; others are invented. In an alarming trend, plaintiffs invariably allege that the defendant accountant not only acted negligently, but also breached a fiduciary duty allegedly owed to the client.

So what does this fiduciary duty mean, anyway? Does an accountant always owe such a duty to a client? Unfortunately, answers to these questions are not entirely clear. Luckily, courts are churning out fresh law on the issue.

But before we look to legal authority, let's examine what it traditionally means to be a fiduciary. Black's Law Dictionary, in a baffling manner, uses almost an entire page defining the cryptic term. One buried line of text appears to embody a cogent definition for our purposes: "A person holding the character as a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires."

That's quite a helping of legalese, I'll admit, but we're getting there. The late, esteemed New York Judge Benjamin Cardozo clarifies the concept: "A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive."

Indeed, the fiduciary relationship itself is difficult to define. The Connecticut Supreme Court, for example, has specifically refused to define a fiduciary relationship in precise detail and in such a manner as to exclude new situations, choosing instead to leave the bars down for situations in which there is a justifiable trust confided on one side and a resulting superiority and influence on the other.

So what duty does a fiduciary owe to its principal? The New York Pattern Jury Instructions provide that a fiduciary owes an undivided loyalty and may not act in a manner contrary to the interests of the principal. The instructions further provide that, "[A] person acting in a fiduciary capacity is required to make truthful and complete disclosures to those to whom a fiduciary duty is owed and the fiduciary is forbidden to obtain an improper advantage at the other's expense."

Thus, in order to establish a breach of this duty, a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant and damages that were directly caused by the defendant's misconduct. Of course, it is a basic tenet of tort law that one standing in a fiduciary relationship with another is subject to liability to the other for harm resulting from a breach of duty imposed by the relationship.

WHAT IT MEANS FOR ACCOUNTANTS

Is there a fiduciary relationship owed to a client? Let's first consider the following: Officers and directors of a corporation stand in a fiduciary relationship to the corporation and owe their unqualified loyalty to the corporation. Similarly, the board of directors of a condominium owes a fiduciary duty to a condominium owner. A real estate broker, as agent for an owner, owes a fiduciary duty to act in the best interests of the principal. Of course, an attorney stands in a fiduciary relationship to her client. Courts have held that even spouses stand in a fiduciary relationship to each other!

So, does the accountant owe their client a fiduciary duty? In light of the above it seems that naturally they would; it is a professional relationship, after all, and there is indeed some semblance of trust between the professional and client. But lo and behold, the answer is a qualified "no," there is generally no fiduciary duty owed.

Absent allegations suggesting a relationship of special trust or dependence beyond the typical commercial reliance of one company on the services of another, an accounting firm's client cannot establish an actionable claim for breach of fiduciary duty. If a client justifiably places a special trust and confidence in the accountant, an accountant may be found to be a fiduciary.

Obviously a client has a great deal of trust in their accountant to begin with; otherwise, no relationship would exist at all. But courts hold that subjective trust alone is not enough to transform arm's-length dealing into a fiduciary relationship. Courts will generally reject claims alleging a breach of fiduciary duty citing the basic legal principal: The duty owed by an accountant to a client is generally not fiduciary in nature.

Accountants wear different hats, of course. Sometimes they are retained to prepare tax returns; other times they are retained to perform reviews of financial statements. It seems axiomatic enough that no fiduciary duty exists in these circumstances. Well, what if the accounting firm is retained to perform an audit? The Washington Court of Appeals has held that, absent special circumstances, an auditor is not a fiduciary of its client, as an independent auditor's primary duty is to the public and this is inconsistent with a fiduciary status. New York and Connecticut law establish that an independent auditor engaged to present an audit opinion as may be required by securities laws owes no duty to third-party shareholders.

In a North Carolina case, a client's allegations against her accountant to investigate a proposed merger involving the client and failure to advise regarding the merger were held to be general malpractice claims, not claims for breach of fiduciary duty.

What if the accountant serves as a "business advisor?" Now it starts getting tricky. In one case, an accounting firm agreed to serve as a business advisor to recommend improvements in internal accounting controls, operating controls and policies. The plaintiff argued that the accountant breached fiduciary duties by failing to disclose that it lacked the expertise necessary to perform the services for which it was retained, and that it lacked expertise to make final decisions on technical issues. The court in that instance held that the firm's engagement was not sufficient to create a fiduciary relationship.

But this business advisor concept can go both ways. If an accountant renders personal, financial or investment advice to the client, a duty will arise, thus exposing the accountant to a potential claim.

In a Texas case, Dominguez v. Brackey Enterprises, evidence was sufficient to support a finding that an accountant had a fiduciary relationship with two client investors who gave money to a seafood broker pursuant to the accountant's advice. The accountant worked for the investors' corporation and was a social friend with one investor. However, the evidence established that the accountant breached his fiduciary duty to his investors when he advised the investors to advance $59,000 to the seafood broker because the accountant was a shareholder, officer and director of the seafood broker and made various assurances concerning the broker to secure an investment. The accountant in that case didn't stand a chance.

The Dominguez case teaches another lesson as well: The accountant involved with the seafood transaction was held personally liable for losses suffered by investors when they advanced money to the seafood broker.

SPECIAL CIRCUMSTANCES

Of course, there are other instances where the fiduciary duty will certainly arise, and accountants should be aware of what the courts call "special circumstances." A fiduciary duty is often found when the accountant is directly involved in managing their clients' investments, assets or internal business operations. This will occur when substantial control over a portion of the client's business is surrendered to the accountant, or simply when money or property belonging to a client is entrusted to the accountant.

In a New York case, accountants were held liable for aiding and abetting the breach of fiduciary duty by the board member defendants in view of the plaintiffs' showing that the accountants had complete knowledge of the misuse of condominium funds and were indispensable to the board member defendants in their efforts to conceal the misuse of those funds.

In another case, the plaintiff accused his accountant of falsely certifying that it had conducted each of its audits in compliance with generally accepted auditing standards. This allegation survived the defendant's motion to dismiss and the court allowed the merits of the breach of fiduciary duty claim to be meted out at trial.

So how is this risk avoided? Sometimes it cannot be. An accountant may be exposed to a potential claim for breach of fiduciary duty even if she acts entirely ethically and in accordance with law. In other words, it does not require any criminal or unethical conduct on the part of an accountant for her to be sued on a fiduciary theory. Every engagement is unique, and whether the duty arises is based on the terms of that particular engagement.

Thus, a practitioner should be keenly aware of the type of services that are to be provided. Of course, it's not advisable for an accountant to immediately cease serving as a financial advisor to a client if that relationship has already been established. Often, certain engagements by their very nature will call for more than the mere preparation of tax returns. But one should at the very least stop and consider the engagement and the risks inherent therein, and, more important, consider potential risks when a new engagement is entered.

I cannot stress enough the importance of a written and signed engagement letter that spells out the exact terms of the accountant/client relationship. Indeed, whenever a new assignment arises, even with a long-standing client, drawing up a fresh engagement letter is good practice. These letters generally serve as authoritative evidence as to the scope of the assignment. In the letter, spell out the scope of the services to be provided, and stick to it throughout the engagement. If circumstances require the scope be modified, simply draft a new letter. As a preliminary matter, a claimant cannot sustain a claim for breach of fiduciary duty if the accountant did not contract for the types of things that will give rise to such a duty.

Of course, the accountant should strictly adhere to the terms of the engagement or risk exposure to claims that exceed that of ordinary negligence. And with regard to negligence claims, one must not forget that accountants have a duty to perform within the scope of their professional accounting standards, which generally go beyond simple auditing and bookkeeping.

Finally, if a claim is brought against an accountant for breach of a fiduciary duty, that practitioner should advise their attorney to consider extinguishing the claim with a motion to dismiss, if the engagement letter and subsequent actions show that no such duty could possibly arise. The accountant should instruct the attorney to get any frivolous breach-of-duty claim out of the way early, as dealing with it will only serve to complicate the litigation discovery process.

As discussed above, lawyers who draft accounting malpractice complaints will use every tool in their arsenal to elicit a swift recovery for their clients. Luckily, the courts have armed accountants and their attorneys with tools to protect against baseless claims for an alleged breach of the often-cryptic fiduciary duty.

Gregory R. Saracino, Esq., is a senior associate with the law firm of Milber Makris Plousadis & Seiden LLP in White Plains, N.Y. His practice area focuses on the defense of attorneys, accountants, and corporate directors and officers. Reach him at (914) 681-8700 or gsaracino@milbermakris.com.

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