Consider This before Serving on a Board

Serving on the board of a business client or local charitable organization is an honor. CPAs are trusted business advisers, and the opportunity helps strengthen relationships with clients and the local community. However, the role and responsibilities of a board member significantly differ from those of a CPA in public practice. To explore the unique responsibilities of external board members--and the exposures they face--two attorneys who defend claims against external board members and accountants were interviewed for this column. James K. Thurston is a partner at Wilson Elser Moskowitz Edelman & Dicker LLP His practice focuses on professional liability coverage matters. His clients include insurers that issue policies for directors and officers. Peter J. Larkin is a partner at Wilson Elser and co-chairs the firm's national accountants practice. He represents accounting firms of all sizes in professional liability malpractice suits and also provides legal counsel to accounting firms on practice management matters. An edited version of the discussion follows. What are the duties of an individual acting in the capacity of a director? Thurston: Regardless of whether public, private, or nonprofit, a director has the following obligations to the company and its shareholders: * Loyalty; * Care; * Obedience; and * Disclosure. Some of these fiduciary duties overlap, but essentially it is required that the individual place the interests of the company first. Are these duties heightened for CPAs who serve as directors? Thurston: Whether the individual is a CPA or a layperson, the duties and obligations remain the same. However, in the event of a claim, it will be assessed whether the individual acted reasonably in comparison to someone with similar credentials. So if you are a financial expert, you will likely be held to having that knowledge in addition to the knowledge of a person without a financial background. Describe the types of claims brought against board members. Thurston: A for-profit director faces multiple types of claims, including violations of antitrust and security laws or regulations, employment discrimination claims (less so than officers), and environmental claims, to name a few. Employment claims are most frequently made, while securities class actions and derivative suits are potentially the most damaging, from a liability perspective. The underlying allegation is likely a breach of a fiduciary duty or board misconduct. Nonprofit boards have less exposure than for profit boards, as many states have adopted some form of immunity for nonprofit directors (they also do not have shareholders). The misconduct threshold is generally higher, requiring gross negligence or willful intentional misconduct. Larkin: Once you sit on a board, you are exposing yourself to breach of fiduciary duty claims, which are different in many ways from malpractice claims. Jurisdiction will play a role in assessing this exposure because the law in each state is different. For example, the statute of limitation may be longer, and the fiduciary duty may lessen the burden of proof for the plaintiff, such as removing the burden to prove causation. A fiduciary duty claim also may open the door for punitive damages, which generally cannot be recovered in malpractice cases. Since you are exposing yourself to a new type of liability, care should be exercised to keep your board activities separate from your firm. So paying the director fees to the firm generally should be avoided to limit any confusion. What additional risks do individuals face when sitting on the board of a client? Larkin: No rule states that a CPA cannot sit on the board of a client (as long as attest services are not provided). However, CPAs should generally avoid this practice. The primary concern is defining where one role ends and the other begins. …