Generally, accountants do not serve as fiduciaries. There are specific circumstances in which a CPA may assume fiduciary responsibilities, but these typically fall outside the traditional job description. However, in recent years, CPAs have begun to offer additional services, blurring the line between advisor and auditor.
Additionally, there has been increased legal pressure from lawsuits claiming CPAs acted as fiduciaries. While these claims would once have been dismissed outright by a court, some suits have gone to trial and placed the burden of proving they were not acting as fiduciaries on the accounting firm.
That is why it is increasingly vital that CPAs understand the fiduciary role and how to limit their liability if they choose to assume that responsibility. This post will discuss these issues and strategies to limit risk.
What exactly is a fiduciary?
Fiduciary is an ancient concept, with origins in Roman legal code. Black’s Law Dictionary defines it as: “a person holding the character of 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.” In simpler terms, a fiduciary is someone who manages an account or accounts on behalf of another party.
It is imperative to note that, legally speaking, a fiduciary is defined by function, not title. In other words, if you hold the title of CPA for a client, but take actions that fall under the purview of a fiduciary, then you might find yourself in court for breach of fiduciary duty. For example, a client may informally ask their CPA to weigh in on a potential investment for an employee retirement plan. Even if neither the CPA nor the client defines it as such, the CPA is still making a fiduciary decision and could be liable for a breach of duty (whether actual or perceived).
The concept of a fiduciary means an advisor acts in their client’s best interests, carefully avoiding conflicts of interest and other potentially thorny moral dilemmas.
When do CPAs serve in this capacity?
Ordinarily, CPAs, though acting under the burden of due care as defined by the AICPA, are not legally bound as fiduciaries. However, CPAs take on this role, either explicitly or by implication, when they:
- Manage a client estate or act as an executor.
- Manage an employee retirement account or make investment recommendations.
- Operate and are licensed in a state with increased regulatory scrutiny, such as California.
A good rule of thumb when determining whether a CPA is acting as a fiduciary is to ask, “Is this accountant making decisions or recommendations for financial matters for their client?” If the answer is yes, then the CPA is most likely a fiduciary.
Also read: Accounting Trends: How the CPA Profession Is Evolving, and What Firms Can Do to Stay Ahead
What liabilities do CPAs face as a fiduciary?
What does serving as a fiduciary do to a CPA’s risk profile? It significantly expands it, as fiduciaries can be held personally responsible for breaches of care. If there are losses in a client’s estate or they take illegal profits, they could make up the loss with private assets. A far more common scenario is that a CPA could face a claim from an administrative mistake, such as missing a deadline or inaccurate reporting, if it results in client losses.
Fiduciary liability is unlimited, meaning exposure is not capped by the initial investment or the total value of business assets. This fact represents a substantial and often underestimated risk. Unlike many common forms of professional liability, where the maximum loss is defined by contract value, the asset base, or a set policy limit, a breach of fiduciary duty can result in personal and corporate financial devastation.
The liability extends beyond simple financial loss to the beneficiary or client. It can encompass all costs associated with remediation, legal defense fees, fines, penalties, and punitive damages imposed by regulatory bodies or courts. In essence, the fiduciary’s entire personal and business estate is potentially exposed to satisfy a judgment, making this type of liability uniquely severe and demanding comprehensive risk management strategies.
How to limit liability while acting as a fiduciary
Fortunately for CPAs, there are straightforward steps they can take to mitigate risk in a fiduciary capacity:
- A clear engagement letter: A good engagement letter is the beginning of a productive client/accountant relationship. Make it clear that if you take on fiduciary duties above and beyond your regular role, it may require a separate engagement letter. Just know that simply saying “I am not a fiduciary” in your engagement letter does not absolve you from risk (recall it is a function, not a title). However, spelling out exactly when you and your client both agree that you are acting as a fiduciary can resolve many conflicts before they begin.
- Communicate clearly with the client: Beyond an engagement letter, make sure you communicate early and often. Email can be a great way to establish a digital paper trail. Even if your client prefers phone calls or other forms of communication, a recap email helps summarize meetings while keeping things transparent.
- Good record-keeping: Fiduciaries need records that move beyond simple facts. They must justify their decisions and prove they were acting on the best information available at the time, should it come up in a claim.
- Seek expert support: Acting as a trustee means seeking expert opinions when a task falls outside your experience. Seeking outside advice can be one way to get qualified information. Be sure to thoroughly vet any consultants before following their advice on behalf of your client.
- Hire a third party: Many small businesses hire outside service providers to manage employee retirement plans, effectively serving as a fiduciary. However, that step does not automatically absolve you of your fiduciary obligations. The choice to hire an outside service provider is itself a fiduciary one.
- Act in good faith: It is an old saying in HR that employees tend to fire themselves. They show up late continuously and drop the ball until a manager has no choice but to terminate them. Similarly, it is much harder for a client to file a claim for a fiduciary breach if you are doing everything in your power to act with the client’s best financial interests at heart.
- Fiduciary liability insurance: Even when you are carefully fulfilling your fiduciary duty of care, claims can still arise. A simple administrative error or oversight can expose your firm to costly litigation. Regardless of merit, defending against a claim requires time, attention, and financial resources.
It is essential to distinguish between fiduciary exposures tied to professional services and those arising from internal plan responsibilities. Claims related to services provided in a fiduciary capacity—such as advising or administering a client’s employee benefit plan—are typically addressed under a firm’s professional liability (E&O) policy.
However, firms may also face fiduciary exposure in connection with their own employee benefit plans. Individuals such as HR professionals or internal plan administrators who manage, oversee, or process plan information may be considered fiduciaries under ERISA. Claims arising from these non-service-related responsibilities are generally covered under a dedicated fiduciary liability insurance policy.
As part of a comprehensive risk management strategy, fiduciary liability insurance helps protect businesses that sponsor or manage employee benefit plans from the complex and evolving legal risks in today’s regulatory environment.
Also read: Data Governance Basics for CPAs: Understanding the Changing Role of Data Governance in an AI World
Lowering your risk profile as a fiduciary
Firstly, do not inadvertently agree to take on fiduciary tasks beyond your regular role as a CPA for your clients, unless you are willing to do so and clearly understand the risks. Clear engagement letters can clear up any confusion on this front with clients. When you do agree to take on fiduciary tasks, take them very seriously and execute them to the best of your ability.
But mistakes happen. That is why it is essential to protect your firm with Fiduciary Liability Insurance. Fiduciary Liability Insurance (FLIP) is explicitly designed to protect fiduciaries against claims related to breaches of fiduciary duty and other fiduciary exposures. It is the only type of insurance that fully covers fiduciary risks. McGowan Professional has decades of experience covering CPAs and other professionals as they execute high-profile decisions for their clients.
Need to design a policy that covers your unique risk profile? Discover how McGowan Professional can help.