What Due Care Means for CPAs: Examining the Standards and Relevant Case Law

"What we hope ever to do with ease, we must learn first to do with diligence."

-Samuel Johnson, in The Life of Samuel Johnson, vol. 4, by James Boswell

Prior to the issuance of the AICPA's Clarified Statements on Auditing Standards, the term "due professional care" was used to characterize the expected performance of a CPA rendering audit services to a client (AU section 230, "Due Professional Care in the Performance of Work"). ET section 201 states that a member must exercise "due professional care in the performance of professional services" (emphasis added by author). But some have claimed that this is at odds with Article V of the Code of Professional Conduct, which describes the principle of due care as adherence to the standards of the profession:

A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.

Although the title of Article V does not contain the qualifying word-professional- the code often refers to professional standards, activities, and responsibility; however, this term has been removed from the clarified auditing standards when it references and defines the responsibilities of the auditor to exercise due care.

The subparagraphs in Article V define the exercise of due care by expanding on its characteristics:

* Excellence-a quest to perform to the best of one's ability

* Competence-a result of education, training, and experience

* Understanding and knowledge-rendering of services with facility and acumen

* Diligence-discharging responsibilities thoroughly

* Planning and supervision-properly administering all professional activities.

Thus, the code recognizes due care as a process, incorporating these characteristics, that members of the AICPA must follow when performing professional engagements. The Code of Professional Conduct and all of the standards regulating the various services provided by CPAs require the exercise of due care. It was best described in the auditing standards by referencing Cooley on Torts-Or, A Treatise on the Law of Torts or the Wrongs which Arise Independently of Contract (Thomas M. Cooley, 1878), which refers to "reasonable care" and an individual's possession of "the degree of skill commonly possessed by others in the same employment." Moreover, according to Coo- ley, an engagement is undertaken in "good faith and integrity, but not for infallibility, and [individuals are] liable to [their] employer for negligence, bad faith, or dishonesty, but not for losses consequent upon pure errors of judgment."

This reference has been superseded by the clarified standards. But what does this mean to practicing CPAs? Does it matter if the word "professional" appears in the title of the relevant standards? Due professional care and due care are synonymous when used to describe the characteristics of the framework used by CPAs to perform any professional service. Furthermore, the definition of due care in the law is very similar to that in the code and in the professional standards, which are considered evidence of an accounting professional's fulfillment of a legal obligation to a client and others.

General Application

When rendering any professional service, a CPA should possess "the degree of skill commonly possessed" by other similarly situated professionals and should exercise it with "reasonable care and diligence" (i.e., with due care). Due care-or due professional care, whichever phrase is used-does not characterize the result of its exercise; it refers to the characterization of the quality of the framework used to give advice, to render an opinion, or to make a recommendation. No result is guaranteed. Only the exercise of care expected of a reasonable professional in the same situation is required.

An important aspect of the requirement to exercise due professional care is that different reactions to a similar set of facts and circumstances can result. There is rarely only one way to react to events that can be characterized as the sole determinant of the exercise of due care. Judgment is involved in most responses related to the development of attest procedures, application of accounting principles, business opportunities, development of structural frameworks, and acceptance of business-based offers. Reasonable people assessing the same set of facts can differ as to the proper course of action to take. Due professional care only addresses the reactions of an ordinary, reasonable person with the expected skill of someone qualified to provide that service, and it is not measured or determined by the results of those actions.

According to the Code of Professional Conduct, the essential elements of due care include competence, diligence, and a concern for the client's best interest (ET section 56.01). The code also states that "integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle" (ET section 54.02). Integrity is implicit in the exercise of due care.

Excellence. CPAs should strive to perform their professional responsibilities competently and diligently. Care should be taken to deliver services that best meet the client's needs within a framework of integrity and objectivity, consistent with the profession's responsibility to the public interest (described in ET section 53).

The public is the client being served and all those who would reasonably rely on the end product of a professional's service (e.g., creditors, governments, investors). These and other members of the public may, depending upon each particular situation, reasonably rely on the competency, objectivity, and integrity of a CPA But the CPA must be aware of this reliance; it cannot be an open-ended concept that allows anyone to rely on the CPA's work simply because it was performed and reported upon.

The achievement of excellence is not meant to be definitive; if it were, only one professional-superior to all others- would be able to perform any service. It does not require CPAs to be omnipotent. The concept does, however, recognize a high level of achievement, attainable by all members of the profession who adhere to the code and make an effort to be informed of both the relevant professional standards and business issues involved in providing services to a client.

Competence. The competence requirement encompasses having or acquiring knowledge of the requisite standards, techniques, and subject matter, as well as the exercise of reasonable judgment; it does not assume infallibility (ET section 201.02).

At minimum, CPAs should obtain required hours of continuing professional education (CPE), with a concentration in the areas germane to the services they normally perform. In addition, many licensing jurisdictions require CPAs to obtain a certain number of CPE hours specifically in the area of professional ethics. CPAs should also read relevant materials related to changes in standards, regulatory requirements, and current business and financial issues that might affect a client's business environment.

When performing an engagement for the first time, professionals should educate themselves on any applicable standards or economic issues related to the successful completion of the engagement. In order to comply with the standards, CPAs do not necessarily need to reject a proposal to perform work in an area different from their normal responsibilities, but they must develop a reasonable level of competence to perform the engagement, through such means as taking a course or reading relevant publications.

Understanding and knowledge. This characteristic relates to a professional's ability to provide the service with facility; the ability to perform the service with relative ease and acumen; and the ability to make quick, accurate, intelligent, and reasoned judgments. The standards also recognize the importance of seeking consultation or referring the engagement to another capable professional when it exceeds a CPA's or a firm's competency. CPAs and their firms are responsible for evaluating their own level of competency-that is, whether their individual or collective education, training, experience, and judgment are sufficient to adequately complete an assignment.

As previously noted, a CPA or firm also can attain the required understanding and knowledge though education, reading, or obtaining consultation on special issues before and during the performance of the engagement.

Düigence in discharging responsibilities. This requires CPAs to render services without undue delay and in a careful, thoughtful manner. CPAs must comply with all of the profession's applicable ethical and technical standards, and thoroughly apply themselves to the tasks at hand.

Taking on the responsibility of performing a professional service requires a mental attitude founded in a sincere desire to deliver those services promptly, with a logically structured approach designed in the client's and public's best interest. To measure a professional's performance, the environment in which the service is performed and the character of the service (i.e., attestation, consultations, advisory, tax) must be evaluated. Integrity and objectivity will always remain paramount in determining whether a professional's performance satisfactorily met the client's desired result within a reasonable time frame.

Planning and supervision. CPAs need to adequately plan an engagement-that is, determine what needs to be done to meet the objectives of the engagement and in what order- and supervise any staff or subcontractors to ensure the efficient and effective accomplishment of the engagements objectives. The planning should be suited to the complexity of the engagement and the achievability of its objectives. Reasonableness normally allows for some flexibility (but not for procrastination) and for different degrees of supervision based upon the level of professionals assigned to the engagement, but not for the assignment of a professional based on availability rather than the engagement's requirements.

A Legal Perspective

In today's litigious society, CPAs regularly find themselves accused of failing to exercise due care in the performance of their professional service engagements; in order to avoid such worrisome situations, it is important to understand exactly what is meant by due care in the context of litigation.

As used by courts, due care is typically a shorthand reference to "reasonable care." As with other professionals-for example, doctors, lawyers, architects, and engineers-the standard of due care (i.e., reasonable care, ordinary care, adequate care, or proper care) also applies to accountants. According to American Jurisprudence, due care for accountants is defined as a duty to exercise that "degree of care, skill, and competence exercised by reasonably competent members of their profession under the circumstances" (2nd ed., Thomson West, 1962). Likewise, the Restatement (Second) of Torts states that accountants, like other professionals, have a duty to perform their services with the "skill and knowledge normally possessed by members of that profession or trade in good standing in similar communities" (vol. 2, section 299A, American Law Institute, 1965).

Courts have also incorporated similar definitions for due care. For example, in Pennsylvania, the court directly quoted the Restatement, defining due care for accountants as "hav[ing] a duty to perform their services with the skill and knowledge normally possessed by members of that profession or trade in good standing in similar communities" {Seitz v. Detweiler, Hershey & Associates PC [in re CitX Corp.], 2005, U.S. Dist. Lexis 11374 [ED. Pa Jun. 7, 2005]). Other courts, such as in California, have held due care to be the "degree of skill and learning possessed by reputable certified public accountants in the same community and [the use of] reasonable diligence and its best judgment in the exercise of its professional skill" (internal quotes omitted by author; Bily v. Arthur Young & Co., 3 Cal. 4th 370, 379 [Cal. 1992]). Similarly, New York courts have stated that due care is the "duty to exercise a reasonable degree of care and competence in the performance of professional services" (Cumis Insurance Society Inc. v. Tooke, 293 AD 2d 794,797 [N.Y. App Div. 3d Dep't 2002]).

Although the language is not exactly the same, germane to all the definitions of due care is that accountants are held to standards commonly possessed by members of the accounting profession performing professional services in similar situations. As previously mentioned, this is not meant to hold each accountant to the standard of the most highly skilled professional, but rather to determine which standards should be used by a qualified, competent professional engaging in a similar service (Restatement [Second] of Torts section 299A).

The prevalent standards that the treatises and case law describe are those imposed by the accounting community as a whole. These standards are derived from numerous sources, most notably the AICPA (see Seitz, 10; Cumis, 797). Other sources typically include the SEC, the PCAOB, FASB, state boards of accountancy, and state CPA societies.

In many cases, courts turn to professional standards promulgated by these authoritative bodies as a basis for determining whether, under certain circumstances, a professional exercised due care. Courts have consistently turned to GAAS, GAAP, 1RS publications, and many other sources of professional guidance in determining whether accounting professionals have acted in accordance with due care (SEC v. Arthur Young & Co., 590 F.2d 785, 788 n.2 [9th Cir. 1979]; Reiger v. Altris Software Inc., 1999 U.S. Dist. Lexis 7949* 20 [S.D. Cal. 1999]).

Typically, the concept of due care arises in the context of malpractice claims asserted by plaintiffs against CPAs. One of the major areas of contention for a plaintiff to establish a malpractice claim is the standard of due care imposed upon a CPA when delivering professional accounting services. This is usually not a straightforward process; although due care has legally been defined, an accountant's duty to a particular plaintiff varies not only by state, but also by the relationship between the CPA and the plaintiff (Restatement [Second] of Torts, vol. 3, section 552 [1977]; see also Bancroft Life & Cas. ICC, Ltd v. Intercontinental Mgmt., 2012 U.S. Dist. Lexis 83056 [W.D. Pa. Jun. 14, 2012]; Damon's, Inc. v. Burman, 1999 Ohio App. Lexis 6485 [Ohio Ct. App., Franklin County, Dec. 21, 1999]).

In particular, the more tenuous a relationship is between a CPA and a plaintiff, the less likely it is that an accountant breached the duty of due care or that the accountant owed this duty to the plaintiff in the first place. Although it can be stated that an accountant always owes a duty of due care directly to a client, that duty is usually dependent upon how focused the engagement is and the scope of the professional services performed (Damon 's; Cumis).

If a CPA owes a duty to a plaintiff, an accountant or auditor generally discharges his professional obligations by complying with professional standards (see SEC v. Arthur Young & Co.) These standards are weighted heavily by courts in determining an accountant's duty of due care and whether a CPA provided services in accordance with these standards; however, compliance with these standards may not always be enough (see Bradford White Corp. v. Ernst & Whinney, 872 Y 2d 1153 [3d Cir. 1989]).

Courts have sometimes viewed an accountant's compliance with the standards merely as evidence of a CPA meeting the standard of due care in performing services to a client (Seitz, citing Robert Wooler Co. v. Fid. Bank, supra, 479 A.2d at 1032 [holding that accountant is not shielded from liability if it ignored "suspicious circumstances which would have raised a red flag for a reasonably skilled and knowledgeable accountant"; internal citations omitted by author]). Even in these situations, performing any professional services in compliance with professional standards provides a strong defense against liability.

Conversely, courts have determined that a CPA who has deviated from professional standards is not automatically presumed to have breached her duty of due care in the performance of her services. Again, these deviations are merely evidence that a judge or jury must consider when reaching an overall conclusion on whether a CPA has met the standard of due care.

Significance for CPAs

Both the professional standards and the relevant law, with minor differences, define the exercise of due care or due professional care in a similar manner. The Code of Professional Conduct and related professional standards all refer to the requirement that CPAs performing any professional service adhere to the General Standards under ET section 201.01:

A. Professional Competence. Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.

B. Due Professional Care. Exercise due professional care in the performance of professional services.

C. Planning and Supervision. Adequately plan and supervise the performance of professional services.

D. Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

Although due professional care is listed separately, all of the General Standards are encompassed in Article V of the Code of Professional Conduct.

CPAs do not need to be infallible in performing services; however, both the standards and the law stress the need to possess the degree of skill common in the profession and to apply that skill in a reasonable and diligent manner. Due care describes the characteristics of the process to follow when performing professional services to meet a client's needs, consistent with the profession's responsibility to public interest. It is not measured by the end result, but by the conscientiousness of the process used to meet the objective. ?

Typically, the concept of due care arises in the context of malpractice claims asserted by plaintiffs against CPAs.

Celia Lawson, CPA, CFE, works with VJL Consulting, LLC, New York, N.Y.Vincent J. Love, CPA/CFF, CFE, is the chairman of VJL Consulting, LLC, and a member of The CPA Journal Editorial Board. Thomas R. Manisero, Esq., is a partner at Wilson Elser Moskowitz & Dicker LLP, White Plains, N.Y.