Retired partners: A liability risk?

Imagine that today is the last day before one of your firm’s partners heads off into retirement. In this moment, it seems incomprehensible that this CPA, who has been essential to the firm for many years, won’t have some role going forward. But what is that role? If not properly managed, how might that role undermine the firm’s future?

What do you do when several of the firm’s clients still call and ask for this person by first name or meet them for lunch? What’s your response when it comes out that the client entered into a transaction you advised against, and their response is, “[Former partner] said it was OK.”?

The professional liability risks posed by retired partners are real and require planning and diplomacy. Unless the retiree has truly unplugged the ten-key for good, the firm may have to grapple with clients who still seek out that person for advice and, quite possibly, a bored individual who still has a strong desire to help both clients and staff. To help address this risk, CPAs need to understand a theory of liability known as apparent authority.

WHAT IS ‘APPARENT AUTHORITY’?

In general, apparent authority may be found where:

• It is objectively reasonable to believe that at the time of the advice, the adviser possessed authority that could be relied upon despite the adviser having no actual, recognized authority; and
• There is actual reliance on the adviser’s statements.

If a retired partner advises firm clients, it may not be immediately obvious to those clients that the firm is not the source of the advice. To the client, the retired partner and the firm are still linked, especially if interactions post-retirement bear strong similarities to interactions pre-retirement.

In isolation, a client might incorrectly view the retired partner’s advice as the firm’s advice, and if the advice is bad, the client may sue the firm — not the retired partner. In a negligence claim, apparent authority may result in the firm being held liable if the average person could conclude that the retired partner appeared to be a legitimate voice of the firm. Liability may also result where the firm learns the retired partner communicates with clients but fails to remediate by saying the individual no longer speaks for the firm.

There is no bright-line indicator of apparent authority. Firms need to ask themselves two questions:

• “Should a client have any reason to question whether the firm is providing advice?”
• “Why are our clients talking to a retired partner (or vice versa)?”

Even when a firm proactively addresses the issue with its partners, there is always some lack of control over what a retired partner might say or do. To help avoid the downside associated with this risk, a firm needs to position itself to compellingly show that when the advice was delivered, the retired partner did not have actual or apparent authority. A firm may also consider contractual loss mitigation terms for prohibited acts.

HOW TO MANAGE THE RISK OF APPARENT AUTHORITY

CPA firms should have a process to formally transition clients in connection with a partner’s retirement, and initiating this process should start well before the partner’s last official day. It’s disorienting for a client to abruptly learn that the person they routinely work with is imminently retiring or has already retired, and it may even prompt them to seek a different firm.

For perspective, imagine how you might respond if you called your longtime physician to set up an appointment and the scheduler replied, “Doctor Y retired seven months ago. I can set you up with Doctor O.”? Having a formal process helps acclimate the client to a new person and helps the firm by gradually integrating new team members while they still have access to the retiring partner’s institutional knowledge. Actively manage this process and do not leave transitioning solely to the departing partner.

It’s also essential to fully separate the partner from the firm. Despite emotional or financial attachments, a retired partner is in many ways no different than a former employee.

Do not let retired partners:

• Share office space with firm personnel or keep their old office indefinitely;
• Attend firm meetings where firm management is prominent or decisions are made;
• Keep firm credit cards; or
• Stay on firm letterhead or in the “About Us” or “Contact Us” sections of the firm website.

If the retired partner is truly separate from the firm, they are in fact a third party, and their unconsented access to client information may violate client confidentiality. Retired partners should not:

• Have physical access to areas containing client information;
• Have electronic access (portals, firm systems and devices, personal devices) to client information and workpaper files;
• Receive client information from clients or other firm staff and partners.

Coach staff on how to handle tricky requests involving the retired partner — e.g., that client that demands you ask that partner because they oversaw the transaction years ago — including when and how to escalate. Engagement teams should exclude the retired partner from client conversations, meetings, or emails, as otherwise this might give the client the impression the retired partner is still involved in some official capacity.

When the partner finally does retire, their email address should be deactivated at a predetermined date. Anyone who subsequently emails that address should receive an automated response that the person is no longer a member of the firm, along with an active phone number or email address for those seeking to contact the firm. Firms may also benefit from sending a short, boilerplate communication to affected clients, stating that the partner is retired as of a certain date, they no longer conduct business on behalf of the firm, and that any client with questions can contact their current engagement partner.

ANYTHING ELSE?

A firm should also request that the retiring partner update social media accounts and professional memberships to reflect that the retiree is no longer a partner of the firm. Similarly, the firm should remind the individual not to make any public comments that intimate to the audience that they speak on behalf of the firm.

If a partner freelances or has formed their own consultancy, the firm should seek contractual assurances that the partner will not reference the firm in marketing materials or communications. The firm should also consider whether it will allow the consultant-partner to engage firm clients directly, through the firm, or not at all.

If a firm learns that a retired partner is representing to others that they are still associated with the firm, the firm should ask the partner in writing to cease this practice immediately. If possible, the firm should also notify those individuals, in writing, that the former partner does not represent the firm and that the firm is not responsible for any information the partner provided.

In a negligence claim, a plaintiff’s success may hinge on keeping the firm and the retired partner inextricably linked. Therefore, it is critical to provide facts that conclusively show the firm and retired partner were separate, and, thus, neither actual nor apparent authority existed.

FINAL THOUGHTS

Let’s be honest — some firms have a partner who everyone can’t wait to see retire. But by and large, retiring partners are held in high regard for what they have accomplished as professionals, as well as the relationships fostered along the way. Goodwill notwithstanding, firms should recognize that allowing a retired partner to freely operate as if they still own the place may create professional liability risks. Clear, proactive communication to both clients and staff, and disciplined planning and execution can help your firm manage the risks and hazards associated with apparent authority.

Required to retire

44% of multi-owner firms have a mandatory age for retirement or sale of ownership.

Source: AICPA PCPS 2020 CPA Firm Succession Survey.

J. Michael Reese, J.D., LL.M., is a risk consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

Continental Casualty Company, 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. All products and services may not be available in all states and may be subject to change without notice.