Considering Serving on a Board? Do Your Homework First

Source: Journal of Accountancy

CPAs are often asked to serve on the boards of clients or local not-for-profit organizations. Board service is an honor and can help strengthen relationships with clients and the community, but it also presents some significant risks. In this interview, James Thurston and Peter Larkin – partners with the law firm of Wilson Elser Moskowitz Edelman & Dicker – discuss these risks and offer tips for minimizing them. Here are some of the highlights:

• Directors have fiduciary duties of loyalty, care, obedience and disclosure. As a financial expert, a CPA's liability for breaching his or her fiduciary duties will be assessed with that expertise in mind.
• For-profit directors face potential liability for a variety of claims. Employment discrimination claims are the most common, but securities-related claims are the most damaging. Not-for-profit directors generally have less exposure and may enjoy some immunity under state law.
• The law varies from state to state, so potential directors need to understand applicable law to assess their exposure.
• Directors should keep their board activities separate from their firms and have directors' fees paid directly to them and not to their firms.
• CPAs should avoid sitting on clients' boards. Although this practice isn't prohibited, it can raise difficult confidentiality and conflict-of-interest issues.
• To mitigate the risks of serving on a board, CPAs should make sure that the organization's bylaws contains appropriate indemnification provisions and that the organization's insurance coverage applies and is adequate.
• Insurance generally doesn't cover liability for unpaid taxes, so it's important to ensure that the organization is current on its tax reporting and payment obligations.
• CPAs should investigate the backgrounds of the other board members. For example, if a CPA will be the only director with a financial background, he or she needs to decide whether to accept that responsibility.

For the complete article, read “Consider this before serving on a board.”

From Journal of Accountancy, January 2014, www.journalofaccountancy.com/Issues/2014/Jan.