Divorce Cases Hold Potential Liabilities for Accountants

By W. Wesley Marston, J.D., LL.M., AIC

"Marriage is about love; divorce is about money."
  Anonymous
 
Unfortunately, divorcing clients may attempt to increase the amount of money they receive by making a claim against their accountant. 
 
When clients divorce, accountants are put in a variety of uncomfortable positions. CPAs are routinely served with subpoenas for depositions and client records.
 
Potential claims arise from perceived conflicts of interest and lack of objectivity, tax advice that allegedly benefits one party over the other and accusations that valuations intentionally overvalue or undervalue a marital asset.
 
Divorcing clients are rarely pleased with the terms of their divorce, and the accountant is an attractive target to blame for a less than favorable outcome.
 
Adele Accountant learned the hard way to be wary of conflicts of interest in divorce situations.
 
Adele was engaged to perform a valuation of Pete's Paving, a paving company owned jointly by a divorcing couple, Peter and Wendy Disso. The divorce was proceeding amicably.
 
Peter had offered to buy Wendy's share of the business for $500,000, and counsel wanted to determine whether this was a fair price. Adele determined that the value was $1 million.
 
Wendy agreed to sell her one-half share for $500,000. Peter refused to agree unless the payments were deductible, so Adele suggested a structure whereby the buyout was deductible to the corporation. The parties reached an agreement and finalized the divorce.
 
Adele continued to prepare tax returns for Peter, Wendy and the corporation. After Wendy received the final payment under the agreement, she was not satisfied with her standard of living.
 
When the judge refused to grant her attempts to get more money from Peter, she turned her attention to Adele. 
 
Wendy claimed that Adele's valuation was flawed, and that Adele failed to advise her that the distribution could have been structured so that it was tax free to Wendy.
 
Wendy alleged that Adele deliberately concealed the alternate tax structure and deliberately miscalculated the value of the company. Wendy sued Adele and claimed damages of approximately $1 million.
 
Adele did not believe that there was a conflict of interest, so she did not disclose the potential conflict and did not seek Wendy's consent. Defense counsel determined that AICPA Code of Professional Conduct, ET §102.03, provided some support for Wendy's allegations.
 
Without a waiver, facts were not favorable. Adele's valuation was identical to the amount proposed by Peter, and her tax advice favored Peter over Wendy.
 
Adele was taken aback as she truly felt that she was merely trying to work out an acceptable buyout for the couple. She thought that her job was done when Wendy and her counsel voluntarily agreed to Adele's first suggested resolution without asking for alternatives.
 
Adele's failure to disclose the potential conflict and obtain a waiver created an appearance of impropriety and risk of a large verdict.
 
Despite defenses that otherwise would have probably led to a defense verdict, settlement was the most prudent course of action.
 
We are aware of at least three cases with facts similar to those in Adele's case. Defense counsel in one case recommends that any time an accountant has prepared joint returns for a divorcing couple, the accountant should consult counsel and obtain conflict and confidentiality waivers from both parties.
 
If they refuse, the accountant should withdraw and cooperate only as required by law to prevent being accused of favoring one party over the other.
 
About the author:
Wes Marston, J.D., LL.M., Vice President  Claims, CPA Mutual Insurance Co. As vice president, Wes evaluates the liability and loss potential of claims and assists insured members with claims made against them. He received a B.A. from the University of Florida in 1983, a J.D., with honors, in 1990 and an LL.M. in Taxation in 1992 from the University of Florida College of Law. Wes is a member of the Florida Bar and is admitted to practice in the United States Tax Court. Prior to joining the Claims team, he was a shareholder in the law firm of Clayton-Johnston, P.A. where he practiced primarily in the areas of taxation, estates and trusts, and business law.
 
About CPA Mutual:

CPA Mutual was formed in 1986 to serve the accountants' professional liability sector. The company has expanded over the decades to include coverage for outside defense cost, aggregate limits and deductibles, electronic data coverage, employment practices liability, and limited liability for small firms that do not provide attestation services. Our focus is and has always been the CPA market. Our goal is to exceed your expectations! For more information, please contact William Thomson, bthomson@cpamutual.com, (800) 543-3029.

 

You may like these other stories...

Tesco says it overstated profit forecastStanley Reed of the New York Times reported that Tesco, the large British grocery retailer, disclosed on Monday that it had overstated its expected half-year profit by about $400...
In today's volatile marketplace, companies, regardless of their size, are dealing with more complexity than ever before. Global markets, which bring both new opportunities and new competitors, far-flung supply chains...
The issue of international assignees was, for a long time, limited to a small number of companies – meaning only those that operated on an international scale. But in recent years, global expansion has shifted into...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.