Due professional care

LINK_POOL = {
"Professional Judgment": "
"Professional Skepticism": "",
"Fiduciary Duty": "
"Internal Controls": "
"Financial Statements": "
"Audit Documentation": "
"Risk Assessment": "
"Compliance": "
"Standard of Care": "",
"Ethical Standards": "
"Negligence": "
"Accountability": "
"Public Interest": "
"Client Confidentiality": "
"Material Misstatement": "
}

What Is Due Professional Care?

Due professional care is the responsibility of professionals to perform their duties with competence, diligence, and a commitment to quality. It is a fundamental principle in various professions, particularly within the field of accounting and finance, falling under the broader category of Professional Standards. This principle emphasizes that individuals offering specialized services are expected to possess and apply the skill, care, and diligence commonly held by others in the same profession. It encompasses maintaining and enhancing professional competence, exercising diligence in service performance, and thoroughly evaluating the quality of work. Due professional care requires professionals to act in good faith and with integrity, aiming to serve the Public Interest while maintaining high standards of quality.²⁸

History and Origin

The concept of due care, from which due professional care is derived, has deep roots in common law, traditionally serving as a test of liability for Negligence. It represents the degree of care that an ordinary and reasonable person would normally exercise in a given situation.²⁷ Within the accounting profession, the principle of due care has been formally adopted and integrated into professional codes of conduct. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct, for instance, has long enshrined due care as a core tenet, requiring members to observe the technical and Ethical Standards of the profession.²⁶,²⁵ This formalization ensures that accountants continually improve their competence and discharge their responsibilities to the best of their abilities, protecting the public interest.²⁴ The Public Company Accounting Oversight Board (PCAOB) also incorporates due professional care into its auditing standards, underscoring its importance for auditors of publicly traded companies.²³,²²

Key Takeaways

• Due professional care mandates that professionals perform their services with competence, diligence, and thoroughness.
• It is a core principle in the accounting and auditing professions, outlined by bodies such as the AICPA and PCAOB.
• Adherence to due professional care helps ensure the reliability of financial information and fosters public trust.
• It requires continuous professional development and the application of Professional Skepticism.
• Failure to exercise due professional care can lead to professional Accountability and legal repercussions.

Interpreting Due Professional Care

Interpreting due professional care involves understanding that it is not a guarantee of infallibility, but rather an undertaking of good faith and integrity in professional practice.²¹ It concerns "what the independent auditor does and how well he or she does it."²⁰ For auditors, this means planning and performing work with a questioning mind and critically assessing audit evidence.¹⁹ It also extends to the proper supervision of assistants and ensuring that all work performed supports the conclusions reached, with adherence to professional standards serving as evidence of due care.¹⁸ In financial advisory roles, due professional care translates into having a reasonable understanding of a client's objectives and a reasonable belief that the advice provided is in their best interest, free from conflicts of interest.¹⁷ Firms must also implement effective policies to ensure Compliance with rules and regulations.¹⁶

Hypothetical Example

Consider an independent auditor, Sarah, who is engaged to audit the Financial Statements of a technology startup. To exercise due professional care, Sarah does not simply take management's assertions at face value. Instead, she plans the audit thoroughly, identifying key areas of Risk Assessment, such as revenue recognition for subscription services and the valuation of intangible assets. During the audit, she exercises professional skepticism, critically evaluating the evidence provided, seeking corroborating evidence, and investigating any inconsistencies. She ensures that her team is adequately supervised and that their work is reviewed meticulously. When she encounters a complex accounting estimate, she consults with a firm specialist to ensure the estimate is reasonable and supported by sufficient evidence. All procedures performed and conclusions reached are thoroughly documented in her Audit Documentation. This diligent approach, encompassing planning, execution, and review, demonstrates her adherence to due professional care.

Practical Applications

Due professional care is a pervasive concept across the financial industry, appearing in various capacities:

• Auditing and Assurance: Independent auditors are required by standards, such as those from the PCAOB, to exercise due professional care in planning and performing audits and preparing their reports. This includes adhering to generally accepted auditing standards (GAAS) for private companies and PCAOB standards for public companies.¹⁵,¹⁴ It involves diligence and critical analysis of all work performed, including the proper supervision of engagement teams.¹³,¹²
• Investment Advisory Services: Investment advisers have a Fiduciary Duty to their clients, which includes a duty of care. This duty requires them to have a reasonable basis to believe that recommendations of securities transactions or investment strategies are in the client's best interest, considering their investment profile.¹¹ The SEC and FINRA actively enforce violations of the duty of care, often highlighting inadequate Risk Assessment, failure to conduct proper Due Diligence on investments, and insufficient account monitoring.¹⁰ For example, in May 2024, the SEC settled charges against a broker-dealer firm for advising clients to transfer securities without disclosing potential conflicts of interest, violating Regulation Best Interest (Reg BI).⁹
• Financial Planning: Financial planners are expected to provide services with competence and integrity, considering the client's best interests. This involves understanding their financial situation, goals, and risk tolerance before making recommendations.
• Corporate Governance: Boards of directors and corporate officers are generally held to a duty of care, requiring them to act in good faith and in the best interests of the corporation and its shareholders. This often involves ensuring robust Internal Controls and sound decision-making processes.

Limitations and Criticisms

While due professional care is a cornerstone of professional conduct, its interpretation and application can present challenges. One limitation is that due professional care does not guarantee a perfect outcome or freedom from error; rather, it implies that a professional has acted with reasonable care, diligence, and skill.⁸ It cannot guarantee that all fraud or Material Misstatement will be detected in an audit, as absolute assurance is not attainable.⁷

A common criticism, particularly in the context of professional Negligence claims, revolves around proving a breach of the Standard of Care. This often requires expert evidence to establish whether a professional's conduct fell below the expected level of skill and diligence.⁶ The complexity of financial products and evolving regulatory landscapes can also make it challenging to define the precise scope of due professional care in every scenario. Furthermore, while accountants generally owe a duty of care to their direct clients, the extent of their liability to third parties who rely on their work can be a complex area of law, subject to specific circumstances and jurisdiction.⁵ For instance, auditors may not owe a duty of care to individual shareholders or potential investors, though they still have a duty to shareholders as a group.⁴

Due Professional Care vs. Fiduciary Duty

While closely related, due professional care and Fiduciary Duty are distinct concepts in finance and law. Due professional care focuses on the quality of the professional's work and the adherence to professional and Ethical Standards in performing a service. It's about how diligently and competently a professional carries out their responsibilities.

A fiduciary duty, on the other hand, is a legal obligation to act in the best interests of another party. It's a higher Standard of Care that implies loyalty and trust. While exercising due professional care is a component of fulfilling a fiduciary duty, a fiduciary duty encompasses broader obligations, including avoiding conflicts of interest, prioritizing the client's interests over one's own, and providing full disclosure. For example, an investment adviser has a fiduciary duty to act in their clients' best interests, which necessitates exercising due professional care in their investment recommendations and ongoing advice.³

FAQs

Who is responsible for exercising due professional care?

Any professional offering specialized services, including accountants, auditors, financial advisors, and other professionals in the financial industry, is responsible for exercising due professional care. It applies to individuals and extends to the overall organization's practices.

How does due professional care relate to client confidentiality?

While not explicitly part of the definition, exercising due professional care often involves upholding Client Confidentiality. Professionals are expected to handle sensitive client information responsibly and ethically as part of their diligent service.

Can due professional care prevent all financial errors or fraud?

No, due professional care aims to reduce the risk of errors and fraud by promoting diligence and competence, but it does not guarantee their complete prevention. Auditors, for instance, obtain reasonable assurance about the absence of Material Misstatement, but absolute assurance is not attainable due to the inherent limitations of audit evidence and the nature of fraud.²

What happens if a professional fails to exercise due professional care?

Failure to exercise due professional care can lead to claims of professional Negligence, disciplinary actions by professional bodies, and potential legal liability for damages incurred by clients or other affected parties. Regulatory bodies, such as the SEC, can also impose penalties and enforcement actions for breaches of care obligations.¹