Balancing Act.

• Author: ARMSTRONG, MARY BETH

Don't get caught holding the wrong set of books.

As CPAs expand their scope of services to include more tax, consulting and business services and less attest-related services, they risk unwittingly taking on a fiduciary duty. Add to this the courts' expanding views of the nature of fiduciary relationships and the risk becomes downright hazardous. Keeping abreast of the nature of fiduciary duties and some circumstances where courts have determined that CPAs had a fiduciary responsibility to their clients will help you stay out of hot water.

TRUST-LIKE

Literally, fiduciary means "trust-like." Attorneys long have acknowledged a fiduciary duty toward their clients and that duty is their underpinning for ethical rules on confidentiality, loyalty, competence, diligence, the responsibility to keep clients informed, and the duty to protect client's rights to make decisions. Speaking on attorneys' fiduciary duties, former U.S. Supreme Court Justice Benjamin Cardozo observed:

"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." [Meinhard v. Salmon, 249 N.Y. 458 464 (1928)].

Because attorneys are aware of their own fiduciary relationship with clients, a plaintiffs' attorney's first instinct might be to attribute a fiduciary relationship to CPAs and their clients, too, even though the CPA never intended such a relationship, nor believed it to exist.

IMPLICATIONS OF FIDUCIARY DUTY

Plaintiffs' attorneys are sometimes eager to establish that a fiduciary duty exists between a CPA and client because of the following legal advantages for their side:

* Expert testimony may not be required as it is to prove the breach of the standard of care for negligence.

* Existence of a fiduciary duty shifts the burden to the defendant to prove that conduct was above reproach.

* The defense of comparative or contributory negligence is not available to the defendant because the case is not grounded in negligence.

* Extraordinary remedies are available for breach of fiduciary duty, including disgorgement of fees and profits. Proof of causation of damages may not be required where the client seeks disgorgement of fees and profits.

* The statute of limitations may be extended, or a fiduciary breach may be subject to a longer limitation period.

THE NATURE OF CPA-CLIENT RELATIONSHIPS

The traditional CPA-client relationship requiring independence was usually not considered a fiduciary one. Courts have generally held that independence is fundamentally inconsistent with...