Your longtime client, Tom Thornburg, worked non-stop for more than four decades to build a successful chain of health food stores worth about $75 million. You have been providing tax, accounting and consulting services to Tom for the past 25 years and during that time you and Tom have developed a strong friendship and deep mutual respect for one another.
You and Tom have had many opportunities over the years to socialize both professionally and personally, and you have seen first-hand some of the struggles Tom has had with his family dynamics. Married three times, Tom has five children in total; his oldest is 42 and his youngest is just 8 years old. His current wife is 28 years his junior and the mother of their youngest child. Suffice it to say she does not get along at all with Tom’s four adult children, especially his oldest, Nicholas. She also has not seemed to enjoy spending time socially with any of Tom’s long-time acquaintances, including you.
Tom put his assets into a family trust 10 years ago, when he married his current wife. At the time, he appointed both you and his son Nicholas as co-trustees of the trust, with all of his children and his current wife as beneficiaries. As you did not believe that the duties and responsibilities of a co-trustee would be that significant, and given the long history of your relationship with Tom, you did not feel it was necessary over the years to issue a separate engagement letter to clarify the scope and limits of the work you would need to perform as a co-trustee; you have been under the impression that Nicholas would take the lead with most of the trustee duties and you would just be his back-up if required. In addition, since you have been performing tax services for Tom’s four adult children for several years, the formality of documenting any additional services related to the trust responsibilities did not seem necessary given your close relationship with them.
Two years ago Tom suffered a severe heart attack, and since then his health has not been good; he has put most of the day-to-day business operations in the hands of his son, Nicholas. Tom was agitated during a phone call with you last week. He was extremely concerned about the deteriorating relationship between his current wife and his adult children, especially Nicholas. Tom shared that since his health crisis, he and his wife have been having some marital difficulties and he suspects that she may be having an affair. He further shared that his wife has verbally accused his son of mismanaging the family business, stating that Nicholas has been negligent in his duties to provide regular accountings to all the beneficiaries of the family trust. Tom is not sure how far she plans to go with her allegations but strongly suspects that she is seeking the advice of an attorney. Tom also believes that she may allege improprieties by you, and pursue legal actions given your role over the years as trusted advisor to the family and your obligations and duties as a co-trustee.
What should you do now?
You should do nothing for now; you are not responsible for any alleged mismanagement of the family business, nor were you asked by Nicholas to provide regular accountings to the beneficiaries.
You should immediately contact both Tom and Nicholas and inform them that you will be formally disengaging as a co-trustee since you have performed no significant services in that capacity since the trust was put in place.
Before taking any actions or disclosing any information to any of the parties, you should consider sending all parties a conflict-of-interest consent and require the parties to sign their acknowledgment before deciding what to do next.
Call Tom’s wife as a friend and “neutral party” to the family and help try to diffuse the tension between the family members.
Doing nothing in this situation is unwise. CAMICO claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding by the trustee or co-trustee regarding their fiduciary duties and responsibilities. In this situation, you have a fiduciary duty as co-trustee to the trust for the benefit of its beneficiaries. Trustees must adhere to laws and regulations governing their role as a fiduciary. While serving as a fiduciary, a CPA must also adhere to professional standards. The standard of care for a CPA serving as a fiduciary is higher than that of a non-CPA, non-professional serving as a fiduciary. Therefore, in hindsight, you should not have taken a “back seat” in this co-trustee relationship with Nicholas, as proactive and careful management of trust issues are essential to avoiding major problems. Consequently, you are now faced with potential liability exposure if this dispute escalates. You should immediately contact CAMICO for guidance regarding your next steps.
Jury standards place a higher responsibility on CPAs to do the right thing and to act as the “watchdog” in all engagements. Disengagement at this point does not eliminate the potential exposure of this situation if allegations are made by the wife regarding your lack of oversight. Clients that have dysfunctional family relationships are common sources of risk for CPAs. In retrospect, given the evidence of the dysfunction in Tom’s family life, it would have been beneficial to contact CAMICO for some risk management guidance regarding how to manage the risks associated with rendering services in conjunction with your role as a co-trustee.
C. Correct. Code of Professional Conduct acceptable level;
The Integrity and Objectivity Rule of the AICPA
(ET 1.100.001 paragraph .01) addresses CPAs’ responsibilities regarding ethical conflicts. ET 1.110.010 details the responsibilities of CPAs in public practice when faced with potential conflicts of interest. These responsibilities include assessing whether an actual conflict exists; assessing whether actual threats can be reduced to an
disclosing the threat to affected clients; and obtaining clients’ informed consent. Other regulatory requirements such as Circular 230 may be more restrictive than the Code and should be considered in the threat analysis.
Because of the breadth and scope of the tax and accounting services you have rendered to the family members over the years, as well as the elevated fiduciary duty you have as a CPA/co-trustee, you must clearly understand the dynamics among the family and related beneficiaries and address any issues that could result in potential or actual conflicts of interest. Given that you are already blessed with the knowledge of the situation, you are already caught in the middle and it’s time to talk with CAMICO to obtain guidance regarding appropriate informed consent agreements to be sought from the parties. If, after speaking with a CAMICO advisor, it is determined that you have an actual conflict, they can advise you regarding your next steps.
This would not be a good idea as you are NOT a neutral party in this situation. Statutory and common law require a fiduciary to be impartial to all beneficiaries unless the governing document provides otherwise. It would be extremely misleading to now “act” as a neutral party given the potential dispute among the wife and the parties. As a CPA acting as fiduciary, you must be vigilant regarding any perceived or real conflicts of interest.
“War Stories” are drawn from CAMICO claims files and illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.