In an increasingly complex and regulated world, businesses and individuals often rely on the expertise of licensed professionals to navigate legal, financial, and operational challenges.

These professionals include attorneys, CPAs, real estate agents, bankers, assessors, valuation experts, stock brokers, investment advisors, accountants, bookkeepers, and risk managers. They are trusted to provide accurate, compliant, and ethical services.

However, when fraudulent activities occur, a critical question arises: should companies or individuals who rely on licensed professionals be held liable for fraud if they have acted in good faith?

This column argues that those who hire licensed and insured professionals should be insulated and immune from vague charges of fraud when leaders rely on these experts to perform their licensed professional duties correctly, and that comparative negligence should place 99% or more of the liability on the licensed professionals unless there is gross negligence and fraud directly by CEOs and leaders.

Furthermore, it highlights that insurance companies and financial markets may withdraw from states that allow for baseless fraud cases against insured professionals, posing a significant risk to the availability of professional services.

The Role of Licensed Professionals

Licensed professionals are individuals who have met rigorous educational, ethical, and professional standards in each state or on the federal level. They are regulated by governing bodies that ensure they adhere to strict codes of conduct and are subject to ongoing education requirements.

These professionals are trusted with significant responsibilities, ranging from financial reporting and investment management to legal representation and property valuation. The very essence of their licensure implies a level of trust and reliability that clients depend upon.

For instance, a CPA is expected to provide accurate financial statements and tax advice, ensuring compliance with complex regulations. Similarly, an attorney is relied upon for sound legal counsel and representation, while a real estate agent is trusted to manage property transactions ethically. These roles are critical in protecting the interests of clients and ensuring the integrity of various transactions.

Immunity From Fraud Charges

The primary argument for granting immunity from fraud charges to those who rely on licensed professionals rests on the concept of reasonable reliance and the principle of comparative negligence. When a company or individual hires a licensed professional, they do so based on the professional’s credentials, reputation, and regulatory oversight.

This reliance should be deemed reasonable, given that the professional has met the necessary standards to obtain and maintain their license. Comparative negligence suggests that the majority of the liability, 99% or more, should rest with the professionals, given their greater knowledge and control over their work.

1. Due Diligence and Reasonable Reliance: Clients depend on licensed professionals to do their job under the law. Comparative negligence should  appropriately place the burden of liability primarily on the licensed professional, reflecting their greater responsibility and expertise.
2. Regulatory Oversight and Accountability: Licensed professionals are subject to stringent regulatory oversight. If a licensed professional commits fraud, they can be held accountable by their regulatory body, which can impose sanctions, revoke licenses, or take legal action. This system of accountability should protect clients who have acted in good faith.
3. Insurance and Risk Management: Many licensed professionals are required to carry professional liability insurance. This insurance is designed to cover damages resulting from errors, omissions, or fraudulent activities. When clients hire licensed and insured professionals, they are indirectly protected by this insurance. In the event of fraud, the insurance can provide compensation, further insulating clients from financial harm.
4. Impact on Insurance Markets: Insurance companies play a crucial role in the ecosystem of licensed professionals. They provide the necessary coverage that allows these professionals to operate with a safety net. However, if states allow for bogus fraud cases where insurance coverage is attacked and large awards are given against licensed professionals without legitimate negligence or crime, insurance companies may choose to leave those states.
5. Encouraging the Use of Licensed Professionals: Granting immunity to clients who rely on licensed professionals and applying comparative negligence to place 99% or more of the liability on the professionals would encourage the use of qualified experts, thereby promoting higher standards across various industries. If clients knew they could be held liable for the actions of licensed professionals despite acting in good faith, they might be less inclined to hire these experts, leading to a potential decline in the overall quality and integrity of services provided.

Key Points:

• No Company or CEO Liability: Companies, owners, or CEOs should not be held liable for any bookkeeping, valuation, or financial statement errors made by licensed professionals.
• Licensed Professionals: These include lawyers, CPAs, bankers, real estate agents, securities agents, valuation specialists, and more.
• Critical Reliance: These professionals are trusted for accurate, compliant, and ethical services.
• Comparative Negligence: 99% or more of liability should be on licensed professionals and their insurers due to their expertise and control over their work.
• Regulatory Oversight: Professionals are regulated and held accountable by governing bodies.
• Insurance Coverage: Professionals carry liability insurance to cover damages from errors or fraud.
• Insurance Market Impact: Baseless fraud cases against professionals could lead to insurers withdrawing from states, reducing service availability.
• Encouraging Professional Use: Immunity for clients promotes hiring qualified experts, ensuring high standards in various industries.

Conclusion

In conclusion, businesses and individuals who rely on licensed professionals should be insulated and immune from charges of negligence or fraud when they act in good faith and rely on these professionals to perform their duties correctly.

The principles of reasonable reliance, regulatory oversight, insurance, and risk management provide robust protection for clients. Comparative negligence should place 99% or more of the liability on the licensed professionals, given their expertise and control over their work.

Moreover, maintaining a fair and balanced insurance market is crucial, as the departure of insurance companies from states that allow baseless fraud cases would severely impact the availability of professional services.

In conclusion, the risk of businesses leaving New York due to prosecutorial overreach poses a significant threat with far-reaching implications, one of which is the potential loss of a staggering $280 billion in tax revenue over the next two decades.

This concern should capture the urgent attention of policymakers and legal authorities. It is imperative that the prosecutorial system evolves to differentiate more clearly between intentional fraud and simple bookkeeping errors, with penalties that are proportionate to the nature of the mistake.

This shift is essential not only for maintaining New York's rigorous standards of financial integrity but also for ensuring that the city does not inadvertently drive away the businesses that contribute significantly to its economic vitality.

By restoring confidence in the fairness and predictability of its legal and regulatory framework, New York can secure its future as a leading global financial hub, thereby safeguarding its tax revenue and economic health for years to come.

If New York does not innovate is regulatory and legal systems, Wall Street could move to Miami, Dallas or Nashville very quickly as others states have zero state taxes and a balanced logical approach to regulations and prosecutions.