The CPA Journal

Who Is a Fiduciary?

Historically, a fiduciary was an individual (or trust company) vested with the power to manage the assets of another (e.g., executors and trustees). This hardly describes the role of a CPA, who, while performing attest services, is prohibited by independence standards from managing assets or operations. Over time, however, the courts have expanded the scope of who is a fiduciary. At first, they characterized persons holding a power of attorney as fiduciaries although such persons, unlike executors and trustees, do not hold legal title to assets. Thereafter, they included attorneys-at-law within the definition of fiduciaries when they handled transactions for their client. In such cases, the courts pointed to the special expertise possessed by the attorney and the client’s necessity to rely upon the attorney’s expertise. The next step came when the courts deemed attorneys as fiduciaries when they simply rendered advice without undertaking to assist the client in the conduct of a given transaction. Finally, the courts applied the fiduciary designation to other professionals that offer advice, such as accountants, engineers, and investment advisers. CPAs who advise their clients on a broad spectrum of matters are subject to a fiduciary relationship.

Nonetheless, not every professional adviser is a fiduciary; nor is every fiduciary likely to have a fiduciary relationship with respect to every piece of advice rendered. This raises the questions: When is an adviser a fiduciary? And, how can the CPA serving in an advisory capacity avoid being deemed a fiduciary?

The courts have generally ruled that not every professional who renders advice is a fiduciary. A fiduciary relationship requires a high level of trust and confidence between the client and the adviser. In addition, there must be a large disparity in relative levels of expertise so that the client is highly reliant on the professional’s advice. Some courts have ruled that the adviser must have invited the client’s reliance on his advice and fully understands that the client would rely upon it. At least one court has stated that, in a fiduciary relationship, the client must not have the ability to judge the appropriateness of the advice. This court went on to rule that a professional can avoid being held as a fiduciary by explaining the advice or by providing the client with information that would permit the client, with the professional’s advice, to assess the risks entailed.

There can be no question that a CPA offering advisory services can be held to be a fiduciary. As a fiduciary, a CPA can be held liable not only for erroneous advice, but also for the failure to have offered advice within the scope of the fiduciary relationship. This makes it all the more imperative for CPAs to structure their advisory relationships to avoid the possibility of being deemed a fiduciary or to limit the scope of any such fiduciary relationship.

For the most part, there is little chance that a CPA will be deemed a fiduciary in most audit and tax preparation engagements. This does not mean, however, that there is no chance of incurring fiduciary liability. For example, a client victimized by an employee defalcation may claim that its independent auditor had a duty to advise it regarding the soundness of its internal controls and that the failure to do so was a breach of fiduciary duty. To bolster such a contention, the client might argue that the CPA was its trusted adviser, that it relied exclusively upon the CPA in this regard, and that the CPA encouraged such reliance. To counter such contentions, the CPA should have the client sign both engagement letters and management representation letters wherein the client acknowledges its responsibility for the establishment of effective internal controls and represents that those controls are adequate for its purposes both to safeguard its assets and to ensure reliable financial data. Such representations should be signed not only by management, but also by the chair of the board of directors or audit committee. In addition, the engagement letter should expressly disclaim any responsibility for the adequacy of the client’s internal controls. (See Exhibit for sample engagement letter language.)

Although tax return preparation engagements, in the strictest sense, do not expose a CPA to fiduciary liability, the rendering of tax advice distinctly carries that prospect because the average client has little knowledge of the tax laws and is usually wholly dependent upon a tax adviser to minimize tax liability. Thus, unless the client seeks other tax advice, there is a strong likelihood that a CPA offering tax advice will be deemed to be in a fiduciary relationship with the client. There are measures that CPAs can take to minimize such a possibility: First, the CPA should include a provision in the engagement letter stating that the CPA takes no responsibility for any tax advice not provided in writing and that the CPA assumes no responsibility to offer advice that is not specifically requested (see Exhibit). Second, at least one court has suggested that advisers may avoid fiduciary liability if they explain the risks inherent in the course of recommended action. If the client is not inclined to listen to such an explanation, these matters should be disclosed in writing.

Nontraditional advisory services, such as investment advisory services and IT consulting services, carry the greatest risk of incurring fiduciary liability. Not only are such services prone to claims of a fiduciary relationship, there is usually a high likelihood that the CPA may make a number of representations claiming special expertise in order to secure the engagement. Such representations will be used by the client’s attorney to prove that the CPA invited the client to place special trust and confidence in the CPA. Nevertheless, it is not inevitable that such advisory relationships will be deemed to create a fiduciary relationship between the CPA and the client. This is particularly true where the CPA does not exercise discretionary power to make investments for the client, or where the CPA provides the client with prompt information regarding all transactions as well as periodic reports showing the results of the client’s investments. Some courts have ruled that where a client has the ability to monitor the results of a professional’s advice, no fiduciary duty is deemed to exist. Nevertheless, if the client is financially unsophisticated, even these preventative measures may not be sufficient.

In the IT consulting area, a CPA’s chances of not being deemed a fiduciary are likely to depend upon whether the client has expertise with computer systems and whether it seeks the assistance of other advisers. Where the client can and does verify the reasonableness of the CPA’s advice with other consultants, the courts are unlikely to find a fiduciary relationship.

CPAs can further protect themselves against being deemed a fiduciary by noting (and, if possible, documenting) the following information: