Among the many roles and responsibilities assumed by accountants, perhaps none is more critical or scrutinized than that of fiduciary. A fiduciary, by definition, is a person or group who holds assets for another party, often with the legal authority and duty to make decisions for the other party. Given this important accountability, a fiduciary is a person in whom someone has placed the utmost trust and confidence. The concept comes from Roman law, and the word comes from the Latin fiducia, meaning "trust."
The fiduciary acts for the benefit of another and should treat the other party's interests as paramount, while acting with a high degree of good faith consistent with their duty of loyalty. Fiduciaries also have a duty of care and have to exercise the skill and care of a reasonably prudent person. They often take legal title to assets but not equitable title, which rests with the beneficiaries or principals. That being the case, they are in a special and unique position of trust and are held to the highest of standards.
Revered former U.S. Supreme Court Justice Benjamin Cardozo, while he was a Justice on New York's highest court, once wrote: "Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a higher level than that trodden by the crowd." (1)
Accountants often find themselves in the role of fiduciary, sometimes by choice and sometimes by circumstance. As such, they need to appreciate the expectations and the risks that come with this highly scrutinized task, and know how to avoid certain risks.
The Risks of Responsibility
The traditional accountant-client relationship usually is not fiduciary in nature, especially if independence is required. However, certain roles that accountants fill are universally regarded as fiduciary in nature, such as:
* Executor or personal representative of an estate;
* Bankruptcy trustee or receiver;
* Investment adviser; (2)
* ERISA employee benefit plan fiduciary; (3)
* Attorney in fact (holder of power of attorney for taxes, financial matters or health care). (4)
When accountants perform these duties, acting as fiduciaries, their actions are dissected and analyzed more closely than normal. The law also treats fiduciaries differently. For example:
* The statutes of limitations are often longer as compared with ordinary negligence statutes of limitations;
* Expert testimony may not be required to show liability as in ordinary negligence cases; and
* The defense of contributory or comparative negligence of the plaintiff is not available as is usually the case in negligence actions.
As a result, the burden of proof may shift to...