As a CPA, Are You Really a Fiduciary?by
One of the greatest assets of the accounting profession is the perceived fiduciary status of its professionals. Almost every proxy statement from a listed public company asks for a vote to confirm the independent auditors. CPAs in local communities are seen as professionals, not salespeople. But is your fiduciary status being eroded?
What is a Fiduciary?
The American Institute of CPAs (AICPA) defines it well: “A fiduciary has a legal duty to act in the best interests of the beneficiary.” It further explains that accountants are not normally considered fiduciaries, but the AICPA Professional Code of Conduct highlights the attributes of objectivity, integrity, free of conflicts of interest, and truthfulness. That’s pretty close.
The financial services industry has long been held to the suitability standard. In simple terms, the recommendations are appropriate for the client’s situation and objective, although they might be more expensive than other alternatives available. The industry has been moving toward a fiduciary standard. Many registered investment advisors (RIAs) and Certified Financial Planners operate on the fiduciary standard.
The Accountant as Fiduciary in an Ideal World
According to the AICPA, the courts have found an accountant can be a fiduciary to his or her client in areas like tax services and asset management. Generally, this is based on three elements:
- The accountant positions himself or herself as an expert.
- The client places trust in the accountant.
- The client is heavily dependent on this advice.
Although the Professional Code of Conduct references accountants who are also RIAs as an example, most accountants probably see themselves in a fiduciary role. Here’s the rationale:
- You are charging for advice you provide on a consulting basis.
- You are not making money by selling the client a specific product.
- You are suggesting the client buy specific products or services elsewhere.
- You let the client make the choice.
Even if you help them along by suggesting individuals or firms, you are providing multiple choices. The client interviews them and makes the final decision.
When Do the Lines Get Blurred?
Erosion of the fiduciary relationship develops if the accountant is paid a finder’s fee for sending business in the direction of a specific financial planner, advisor, or insurance agent. Now there is an incentive to choose that provider over others.
This brings up the question: Is the CPA acting in the client’s best interests? The AICPA stipulates the fee must be disclosed to the client. The issue is controversial.
Suppose the accountant also performed the services herself. Financial planning is one example. Acting as an RIA was mentioned earlier. The concept of “fee only” financial planning means the planner learns about the client, delivers a plan, and collects a fee. Products and services are purchased elsewhere.
This gets blurred when some advisors describe themselves as “fee based,” meaning the plan is delivered for a fee, but the products sold are based on commissions. If the accountant also sells investments, it raises the question: Is the client getting the best pricing?
Now suppose the accountant doesn’t sell investments or provide financial planning, but her brother-in-law does. She directs business across the street because she trusts her in-law to be ethical. It still raises the question of pricing.
Finally, there’s the multinational corporate example. We earlier established many large firms hire independent auditors. They also hire firms to provide accounting services and business consulting services. You are probably familiar with the accounting scandals at Waste Management (1999) and Lehman Brothers (2010). Often the audit firm is involved. There’s a conflict of interest.
Is There a Limit to Fiduciary Responsibility?
A person who sees the spending habits of another person knows an amazing amount about his or her personal life. Some accountants often handle budgeting and bill paying for clients. Business managers for sports stars and Hollywood celebrities come to mind. However, an accountant who prepares taxes for people in the local community might find himself reviewing their credit card and checking account statements.
Most people were not born to be master criminals. They leave too much evidence behind. People having affairs often leave behind evidence on their credit card statements. Can you even check into a hotel today without producing a credit or debit card? Habitual drug users might exhibit certain spending patterns.
Does an accountant acting as a fiduciary have a responsibility to advise the spouse or parents of their grown child about the issue he discovered? Or would it be considered an invasion of privacy or betrayal of trust?
One financial advisor I learned about had an interesting way of establishing his value with existing clients. Every few years he would strongly recommend they shop around for another advisor. He would even do the preliminary research so they could call and set up interviews. His objective was for the client to decide whether their current advisor was acting in their best interests and charging a fair price for the service he delivered. Getting a satisfied client to shop around sounds a bit extreme.
Here’s one final note on the fiduciary relationship. It’s often likened to the Seal of the Confessional within the Roman Catholic Church. Secrets stay secret. Attorney-client privilege is another example familiar to TV drama fans. There’s a related category for client-lawyer confidentiality. Federal law does not recognize an accountant-client privilege; however, this is a very complicated area.
What happens in Vegas doesn’t necessarily stay in Vegas.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.