Are you or any of your partners, officers, directors, employees, or associated professionals a CPA?
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Why the carrier asks
This question helps the insurance carrier identify a potential conflict of interest. While being a Certified Public Accountant (CPA) is a mark of professionalism, it creates a potential conflict if your firm provides both investment advisory services and accounting services to the same client. The strict independence standards required for CPAs (especially for audit work) can be compromised by an advisory relationship, increasing the risk of E&O claims related to a lack of objectivity.
Key terms
- What is a "CPA"? A Certified Public Accountant is a trusted financial advisor licensed by a state board of accountancy who helps individuals, businesses, and other organizations plan and reach their financial goals.
- What is "Professional Independence"? A core principle of the accounting profession requiring a CPA to be free from conflicts of interest and to maintain an objective, impartial attitude when performing certain services, especially audit and other attest engagements.
- What is an "Attest Engagement"? An engagement where a CPA issues a report on the reliability of a subject matter. The most common example is an audit of a company's financial statements.
How to answer
To answer this, you need to determine if anyone in your firm who is covered by this insurance application holds a CPA designation.
- This includes yourself, partners, officers, and any employees or associated professionals.
- The question is simply about whether anyone holds the credential, regardless of whether they are actively practicing as a CPA.
- If the answer is "yes," you will be required to answer a follow-up question about the specific services those CPAs perform for advisory clients.
If no one in your firm holds a CPA designation, you can answer "no."
Common mistakes
- Mistake: Believing that since a person's CPA license is inactive, it doesn't need to be disclosed.
- You should disclose the status. Even an inactive CPA might be held to a higher standard of care or create a perception of expertise that could be relevant in a claim.
- Pitfall: Thinking this question is about your firm being a CPA firm.
- This question applies even if your firm is solely an RIA. It asks if any individuals associated with the firm are CPAs, as this can still create a conflict if they provide services to your advisory clients.
Frequently asked questions
What information will be asked in the follow-up question if I answer "yes"?
The next question will ask if any of the CPAs at your firm perform attest work (like audits) or consulting services for any accounting client who is also an advisory client of your firm.
Our firm has a CPA on staff, but they only do internal accounting for our firm, not for clients. Do I answer "yes"?
Yes, you must answer "yes" because you have a CPA on staff. However, when you get to the follow-up question, you will be able to clarify that they do not provide services to any advisory clients, which resolves the conflict of interest concern.
If yes, do any such persons perform or attest work/consulting services for any accounting customer who is an advisory customer?
This is a follow-up to Question 14c. It should only be answered if you answered "yes" to having a CPA at your firm.
Why the carrier asks
This question drills down into the potential conflict of interest identified in the previous question. The goal is to determine if the potential conflict has become an actual one. Providing both advisory and accounting/attest services to the same client severely impairs the objectivity and independence required of a CPA, creating a significant liability risk for the firm.
Key terms
- What is "Attest Work"? This is a formal service where a CPA provides assurance on the reliability of financial information. The most common example is an audit of a company's financial statements. A CPA must be independent to perform attest work.
- What are "Consulting Services"? This is a broad category of professional services provided by a CPA, such as tax preparation, bookkeeping, or business consulting. While some consulting services do not impair independence, others can, especially if they involve management functions.
How to answer
To answer this, you must determine if any CPA at your firm is providing accounting-related services to a client who also receives investment advisory services from your firm.
- Review Client Lists: Compare your list of accounting/consulting clients with your list of investment advisory clients.
- Identify Overlap: Determine if any client appears on both lists.
- Consider Services: For any overlapping clients, identify the specific services being provided by the CPA.
If any CPA provides attest or consulting services to a client who is also an advisory client, you must answer "yes."
Common mistakes
- Mistake: Thinking that only audit services create a conflict.
- While audit (an attest service) is the clearest impairment of independence, other services can also be problematic. For example, providing bookkeeping services while also advising on investments can create a conflict.
- Pitfall: Believing client consent waives the conflict.
- For attest services like audits, professional standards do not permit a waiver. The independence rule is absolute. For other services, while disclosure is required, a conflict may still exist in the view of regulators and insurers.
- Mistake: Separating the services into different legal entities owned by the same people.
- Regulators and insurers will look at the substance of the relationship. If the same principals own and control both the CPA firm and the RIA firm, the conflict of interest still exists for clients served by both.
Frequently asked questions
We do tax preparation for some of our advisory clients. Do we have to answer "yes"?
Yes. Tax preparation is a form of consulting service. While it doesn't always impair independence in the same way an audit does, it is an overlapping service that creates a potential conflict and must be disclosed here.
A CPA at our firm provides advice to a client, but the client's audit is done by a completely separate, unaffiliated CPA firm. Is that a conflict?
No, that is not a conflict. The independence issue arises when the same firm or affiliated firms provide both services to the same client.
This guide explains what application questions generally ask and how carriers tend to read the answers. It isn't legal advice or a coverage determination: your carrier's application and policy wording control. When you're unsure how to answer, ask your broker before you sign.
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