When is a partner “retired”?

When a longtime partner or employee retires from a CPA firm, a sense of loyalty often compels the existing partners to allow the individual to have a symbolic role at the firm. This can include a courtesy title, office space, and invitations to company soirees. While this may seem like a small reward for decades of hard work, it can pose significant risks to the firm from a legal standpoint.

HOW SHOULD A FORMER PARTNER OR EMPLOYEE BE TREATED?

When a partner or an employee retires, the CPA firm should make sure that the individual does not give clients the appearance that he or she is still working for the firm. As such, retired partners or employees should not be allowed to share office space with firm personnel. If this is not possible, the former partner’s or employee’s name and, if applicable, any new firm affiliation should be listed separately on the door, in the telephone directory, on the firm website, and with office building security.

Professional staff and the retiree should be reminded often of the importance of not creating the appearance of a principal/agent relationship with a client. Because the retired partner or employee no longer represents the CPA firm, letterhead and published marketing materials should clearly note that he or she no longer acts on behalf of the firm. Similarly, any references to the retired partner or employee on the firm website should be removed or clarified to indicate that the individual is no longer associated with the firm.

Sometimes a CPA firm learns that a former partner or employee has represented to others that he or she is still employed by or associated with the firm. If that happens, the firm should send the retiree a letter asking that this practice cease immediately. If possible, the firm also should make sure that the individuals who received such information are advised in writing that the firm does not maintain a relationship with the former partner or employee.

LESSONS LEARNED

As the case study appearing with this column illustrates, in most circumstances, a CPA firm should sever all business ties to a retired partner or employee to avoid potential litigation. The firm should consider amending its partner agreement to ensure that when a partner or employee retires, he or she can no longer use firm office space, personnel, letterhead, billing systems, and marketing materials to conduct business.

If severing all ties to a retired partner or employee is not practical, the CPA firm should clearly identify the retiree or departed employee’s specific role within the firm. If firm letterhead, websites, and marketing materials continue to refer to a former partner or employee, they should clearly identify the individual as being “retired” or “of counsel.” Furthermore, all invoices or bills sent to the client should note that the fees are for professional services rendered by the former partner or employee and not the CPA firm. If possible, the retiree should use his or her own invoices and billing system and note that any and all fees were not incurred by the firm. 

When a partner or employee retires, protocol requires immediate contact with that partner’s or employee’s clients to tell them of the departure and introduce the new engagement partner. This will ensure a smooth transition and avoid any confusion about which professional has been assigned to the accounts going forward. Only by notifying clients and clarifying the nature of the relationship with retired partners and employees can the CPA firm provide for seamless client transitions and mitigate the risk of vicarious liability exposure.

CASE STUDY: HOW A RETIRED PARTNER’S ACTIONS CAN LEAD TO LEGAL TROUBLE

The following scenario is based on the facts of an actual insurance claim.

A partner who retired from a CPA firm was allowed to maintain an office at the firm, to be listed on its letterhead, and to use its billing system. 

A client hired the former partner to render investment advice. They subsequently met several times in the former partner’s complimentary office at the CPA firm to discuss a potential business venture. The former partner performed a due-diligence examination of the business for the client and reported that the company was adequately capitalized and that its founder had a proven track record. As a result, the client invested $2.3 million in the business.

Unbeknown to the former partner and the client, the company founder was a convicted felon who had been siphoning large sums of money from the business for his personal use. The company later went bankrupt, and the client lost his entire investment. 

The client then sued the former partner and the CPA firm for fraud and professional malpractice alleging that they knew or should have known about the issues with the company. In naming the firm, the client argued that when he engaged the former partner, he thought he also was hiring the CPA firm. The CPA firm asserted that because the former partner had retired from the firm, it should not be held liable for his actions.

Because the former partner appeared to be acting as an agent of the firm, the CPA firm could have been held vicariously liable to the client under the legal theory of “apparent agency.” Given these exposure factors, the claim against the former partner and the CPA firm was eventually resolved for an amount that was well into the seven-figure range.

Stanley D. Sterna (specialtyriskcontrol@cna.com) is a claim director at CNA.

Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.