Client Board Meetings Offer Opportunity to Shine, but Don’t Trip Over Legal Line

by Jonathan S. Ziss, JD | Sep 03, 2019

Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.

The board of directors of a corporation should meet annually, if not more frequently. Partnership agreements, too, commonly require an annual meeting (at minimum). Agenda items for these meetings may include election of officers and directors, decisions concerning distributions, officer compensation, retirement plan contributions, review and approval of loans to shareholders, and ratification of key management decisions made during the year.

For the practitioner who serves small to midsize clients (rather than large public or private entities), it is almost always worthwhile to be a part of board or partnership meetings. There is a role for the CPA to play concerning the plans for certain agenda items the board may be considering and to properly document various decisions that have tax implications so they are part of the corporation’s tax records. Live attendance is encouraged, as your availability can only encourage questions and provide documented confirmation concerning tax planning.

There are, however, a few important caveats that should be kept in mind by the practitioner in attendance.

Remember, the applicable operating agreement, partnership agreement, or bylaws are legal documents. They may contain, or appear to contain, ambiguities, inconsistences, missing provisions, or provisions that are inconsistent with current law. Should you notice these, you must keep in mind that the practitioner is not tasked with pointing out, advising, or resolving any such legal issues. Stick to tax matters. Questions surrounding the meaning, intent, or implementation of documents should be addressed through legal counsel. Bear in mind that governing documents commonly contain a “governing law” clause, which may stipulate that, say, a Pennsylvania LLC’s operating agreement is governed by Delaware law. With each state having its own corporate (for-profit and not-for-profit) statutes, as well as partnership laws, knowledge of these matters is critical, but is properly left for counsel.

That being said, a board’s failure to strictly comply with its own governing documents in all respects is perhaps more common than not, whether the entity is a not-for-profit swim club or a sophisticated, professionally managed entrepreneurial enterprise. What should a practitioner do in circumstances involving a deviation, such as a nonconforming vote or an unratified declaration of distributions? One approach would be to suggest that counsel be consulted and make a memo to the file to this effect. If an action taken by the board would have a tax effect, and this effect is duly communicated, the fact that authority for the action may be subject to later legal challenge by one or more members/shareholders is likely not the determinant for tax compliance. (A private consultation by the practitioner with her or his own attorney may be indicated and, if allowed by the engagement letter, may be chargeable to the client.) Clients should bear the risk of unauthorized board actions, not their CPAs.

Should you attend board meetings, always be vigilant for potential conflicts of interest. Your client is the entity, not the individual owners in this setting. If dissension should surface, “adviser” is the watchword, not “advocate.” The minority position could regard you as being allied with the majority, suggesting favoritism is at play more than professional regard for a given position or action. Make your positions clear, and by all means make a note to your file concerning any such discussion.

Overall, participation in an annual meeting gives the practitioner an opportunity to shine. You will remind the client of your value to the entity by addressing forward-looking tax planning, discussing additional services that you or your firm can provide when the time comes, and you can get that all-important engagement letter signed.

One final note: for attest clients, careful consideration must be given to maintaining independence in the board meeting setting.


 
Jonathan S. Ziss, JD, is a partner with Goldberg Segalla LLP in Philadelphia. He can be reached at jziss@goldbergsegalla.com.

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