Fiduciary duties of a CPA/business advisor. (An Advertising Supplement).

As a growing body of case law suggests, CPAs may be considered fiduciaries to their clients when they render a variety of services including tax services, asset management and general business consulting. Where a fiduciary relationship exists, an accountant has a higher level of duty to the client and hence a greater potential for liability. That's why it's important for CPAs to consider when they might be stepping over the fiduciary line, and what the moral and legal responsibilities are that come with that enhanced status. To address these issues, CPAs are well advised to get familiar with the guidelines. Equally important, clients of CPAs must learn to protect themselves beyond the tacit understanding that now represents the relationship.

A Moral and Legal Responsibility

The courts say there are three elements that must be present for a CPA to be deemed a fiduciary to a client:

* When the CPA holds himself or herself out as expert in one or more aspects of business

* When the client places a high degree of trust and confidence in the CPA

* When there is a large disparity in the relative levels of expertise and knowledge between the client and CPA (e.g. The client is heavily dependent on the CPA's advice.)

* When these elements exist and the CPA is deemed to be a fiduciary to the client, the CPA must exercise the utmost care in the performance of his or her engagement. That means going beyond the normal standard of care a reasonable and prudent accountant would exercise in the performance of his or her engagement.

The Accountants' Mutual Insurance Company (CAMICO) for virtually all accounting firms in California, recently conducted a public survey asking for agreement or disagreement with the following statement, "If an entity hires a CPA firm to evaluate its financial condition, the accounting firm is responsible for discovering any serious problem." Fifty-two percent of those surveyed agreed with the statement and nine percent agreed strongly. Also, according to CAM ICO, CPAs should be good documenters and take affirmative steps to uncover fraud or discover other problems in a client's business. In other words, clients expect CPAs to help them find and solve problems in their business.

Smaller and middle market businesses are particularly dependent upon their CPAs for business advice, especially because the CPA may be the owner's only sophisticated business advisor. In those cases, particularly where CPAs hold themselves out as business advisors to clients, they may have a higher duty to discover and inform the client of potential problems. In some situations, the CPA may also have a duty to either solve the problem or refer the client to someone who can.

CPAs Beware!

This by no means implies that CPAs should suspend their roles as trusted business advisors to their clients. Of all professionals, they are in the best position to assist clients in making sound business decisions. However, CPAs must protect themselves from liability through due diligence in the following areas:

Third parties. When CPAs hold themselves out to be knowledgeable in a specific area, they have an affirmative duty to assist the client in that area or bring in a third party if necessary. As a general business advisor, it is the CPA's duty to be familiar with various aspects of a client's business--e.g., insurance, legal issues, IT, HR, sales and marketing. One way to fulfill this duty may be to develop relationships with consultants who are knowledgeable in these and other fields. True, bringing in a third party to assist a client may increase the CPA's responsibility for the performance of the third party. However, a CPA who discovers a problem and does nothing to help a client solve it may be breaching a fiduciary duty to the client, leading to potential liability claims.

The CPA's role. CPAs need to think critically about their roles with each of their clients. Those who want to be trusted business advisors must be prepared to accept the responsibilities and liabilities of that enhanced status. "Make sure you are well informed in the specific field in which you give advice so that you can provide due care," says Dan Crouch, Senior Writer with CAMICO. "Most CPAs' losses come from areas in which they are dabbling."

Engagement letters. In view of recent case law, it may be necessary to revise engagement letters. "CAMICO recommends engagement letters for all engagements, listing limitations to the responsibility the CPA is willing to accept," says Crouch.

Document! CAMICO recommends that CPAs document all advice given and confirm it with the client in writing.

Know the client. "Perform background checks to screen prospective clients and review current clients," recommends Crouch. Determine the client's level of expertise and prior experience with other professional advisors. The less sophisticated a client, the more dependent he or she will be on the CPA for assistance.

Insurance. CAMICO recommends that all CPAs obtain a good errors and omissions insurance policy.

Being a fiduciary raises the bar on an accountant's performance. CPAs who call themselves business advisors need to act like business advisors and be prepared to accept the implied responsibilities.

Clients Beware!

CPAs who go beyond their role as accountants can be an invaluable resource to the small or middle-size market enterprise. Exceptions occur, however, with CPAs who enjoy the credibility that comes with the title, but aren't willing to accept responsibility for that level of service and advice. Due diligence is in order in the following areas:

Clarify the role. "Look for a CPA who specializes in the type of work you need done," says Crouch. Don't assume that the CPA will be able to provide general financial and business advice. Ask and clarify.

Expertise and experience. Look for a CPA who has industry experience and specific expertise so that the individual can quickly and efficiently identify potential problems and suggest solutions for the particular circumstances.

Third parties. Ask the CPA if he or she works with other professionals and can recommend consultants when necessary. Also, ask the CPA for an example of past work with a team of experts that is as relevant as possible. Ideally this would include the same industry and similar circumstances.

Expect More

Any CPA who uses terms on promotional material such as "business advisor" or "financial manager" faces a tradeoff. In exchange for the credibility that comes with calling oneself a business advisor is the responsibility to act like one. That means a willingness to accept the responsibility that comes with the possible status of a fiduciary. CPAs who claim the business advisor role often end up as valuable strategic partners and allies to business owners. For this reason especially, clients have the right to expect much more than accounting from CPAs who call themselves business advisors.

Joe G. Block, known by his clients as the Growth Architect, was initially a CPA and is now President of Growth-Logic, Inc., a growth-focused corporate consultation firm in Agoura Hills.

Catherine DeBono Holmes is a corporate partner with Jeffer, Mangels, Butler & Marmaro, LLP.