Red Flags Indicating a Breach

Of Fiduciary Duty in Financial Disputes

Forensic accountants are frequently brought into litigated disputes to examine whether individuals in positions of trust, such as business partners, executives, or agents, have breached their fiduciary duties. While this article concerns legal issues, the author intends to express no legal conclusions and/or opinions. Forensic accountants should consult the counsel that engaged them.

Introduction

Forensic accountants are frequently brought into litigated disputes to examine whether individuals in positions of trust, such as business partners, executives, or agents, have breached their fiduciary duties. While this article concerns legal issues, the author intends to express no legal conclusions and/or opinions. Forensic accountants should consult the counsel that engaged them.

At its core, a breach of fiduciary duty arises when a fiduciary fails to act in the best interests of the party to whom the duty is owed, typically by violating duties of loyalty or care. In practice, this often shows up as self-serving transactions, misuse of company funds, or accounting practices designed to benefit the fiduciary at the expense of others.

Although the ultimate determination of whether a breach of fiduciary duty occurred is a legal conclusion reserved for the court, forensic accountants play a vital role in identifying and documenting the financial indicia—the “red flags”—that may support such a finding.

Understanding Fiduciary Duty

A fiduciary is someone obligated to act with utmost good faith and loyalty for the benefit of another. Classic examples include company directors toward shareholders, business partners (toward each other), agents toward their principals, executives toward their company, officers, directors, and key employees.

Fiduciary duties encompass the duty of loyalty (putting the beneficiary’s interests above one’s own), the duty of care (acting prudently and diligently), and often, a duty of candor or disclosure.

In the financial realm, a fiduciary must not use their position of trust to gain an unfair advantage or secret profit. The Texas Supreme Court, for instance, has explained that an employee with fiduciary obligations:

“must (i) account for profits arising out of the employment; (ii) not act as, or on account of, an adverse party without the principal’s consent; (iii) not compete with the principal …; and (iv) deal fairly with the principal in all transactions between them.”[1]

Accounting Experts’ Boundaries

It is important to draw a clear line between what forensic accountants can and cannot do when rendering expert opinions on breach of fiduciary duty. While forensic accountants are well-positioned to identify financial anomalies and patterns that may indicate a breach of fiduciary duty, the author’s understanding is that they cannot opine that a breach has occurred (that determination is a legal conclusion reserved for the court or judges).

Instead, the expert’s role is analytical. Forensic accountants reconstruct transactions, trace the movement of funds, quantify losses or ill-gotten gains, and analyze whether conduct aligns with, or departs from, expected fiduciary behavior. In many cases, this means explaining why certain transactions appear self-serving, irregular, or inconsistent with the entity’s stated purpose or internal controls.

Put simply, experts identify the indicia of wrongdoing. Unexplained transfers, suspicious payments, or irregular transactions that disproportionately benefit a fiduciary should be highlighted and documented, but it is left to the fact-finder to decide whether those facts rise to the level of a legal breach of fiduciary duty.

The Most Common Indicia of Breach of Fiduciary Duty

What follows is a discussion of the most common indicia of breach of fiduciary duty usually noted in the accounting and commercial litigation context. Each category that follows reflects a recurring pattern of conduct that courts have repeatedly recognized as inconsistent with fiduciary obligations.

Examples of Common Accounting and Financial Breaches of Fiduciary Duty

The author’s understanding is that courts do not evaluate breach of fiduciary duty in the abstract. Instead, they rely on concrete, observable facts, financial behaviors, transaction patterns, and decision-making conduct that collectively indicate disloyalty, self-interest, or abuse of trust.

For forensic accountants, the task is not to opine whether a breach occurred, but to identify, document, and explain these factual indicia in a manner that assists the court. Set out below is a non-exhaustive list of accounting and financial breaches of fiduciary duty distilled from the author’s review of breach of fiduciary duty case examples. Each item reflects conduct that courts have previously relied upon when finding a breach of fiduciary duty in the accounting and finance context. These indicators are intended to guide expert inquiry, document review, and analysis (not to substitute for legal conclusions).

• Inserting oneself into a transaction as an undisclosed intermediary[2]
• Earning hidden profits through transactions handled on behalf of the principal[3]
• Using the principal’s funds to finance personal transactions[4]
• Misrepresenting transaction terms while secretly arranging more favorable deals[5]
• Causing the company to transact with entities owned by the fiduciary or relatives on non-arm’s-length terms[6]
• Using company or nonprofit funds to pay personal expenses[7]
• Paying oneself unauthorized or excessive salary, bonuses, or severance[8]
• Charging personal living, travel, or lifestyle expenses to the business[9]
• Making unexplained transfers to personal accounts or controlled entities[10]
• Treating company accounts as personal accounts[11]
• Concealing revenue to reduce distributions owed to partners or shareholders[12]
• Retaining profits contractually owed to others[13]
• Structuring operations to deny co-owners their agreed-upon share[14]
• Concealing revenue or inflating expenses to suppress profits[15]
• Manipulating journal entries to affect formula-based compensation[16]
• Reclassifying transactions or shifting timing to meet bonus thresholds[17]
• Writing down assets or accelerating depreciation to reduce buyout values[18]
• Deviating from GAAP in ways that consistently favor the fiduciary[19]
• Awarding oneself outsized compensation without proper authorization[20]
• Disguising profit distributions as bonuses or commissions[21]
• Implementing sudden pay increases shortly before resignation, sale, or merger[22]
• Approving compensation inconsistent with company performance or industry norms[23]
• Operating a side business while still owing fiduciary duties[24]
• Diverting customers or revenue to a competing venture[25]
• Using company resources to support personal enterprises[26]
• Allowing company revenues to decline while secretly redirecting business elsewhere[27]
• Inducing a buyout while concealing competing interests[28]
• Accepting buyout consideration obtained through nondisclosure or deception[29]
• Taking trade secrets, customer lists, or pricing data upon departure[30]
• Working simultaneously for competing companies without disclosure[31]
• Serving competing interests while still owing duties to the principal[32]
• Benefiting personally from opportunities belonging to the company[33]
• Failing to disclose conflicts of interest in financial decisions[34]

Beyond Financial Misconduct: Other Breaches to Consider

Although this article focuses on accounting and finance-related breaches, fiduciary duties can also be violated in other, less quantifiable ways as well.

Corporate governance failures, undisclosed conflicts of interest, and improper professional conduct may all constitute breaches of fiduciary duty, even where no funds are misappropriated. Courts have, for example, required attorneys to forfeit fees for breaching fiduciary obligations to their clients, as seen in cases such as Burrow v. Arce and Ulico Casualty Co. v. Wilson.[35]

Other decisions have treated violations of confidentiality agreements as fiduciary breaches, including Snepp v. United States,[36] where a former CIA agent’s breach of his secrecy agreement was treated as a fiduciary breach resulting in disgorgement of his book profits.

Forensic accountants might not be directly involved in proving some of these “softer” breaches, but it is important to be aware of them. Often, the forensic accountant’s retaining counsel will identify governance or professional-duty breaches, while the forensic accountant focuses on the financial evidence that might support those claims (for example, tracing a transaction that indicates a conflict of interest or quantifying the benefit gained by the disloyal fiduciary).

In summary, not every breach of fiduciary duty is about money. Some are about loyalty and good faith. However, even in those cases, forensic accountants can play a supporting role that might indicate a money amount, i.e., calculating the fee to be forfeited, the profits to be disgorged, or the economic impact of a disloyal act. Therefore, a well-rounded and seasoned forensic accountant remains mindful that financial indicia may be the “smoking gun” for various types of fiduciary misconduct.

Conclusion

Courts consistently focus on concrete financial behaviors that reveal divided loyalty, undisclosed self-interest, or misuse of entrusted authority, like inserting oneself into transactions for secret profit, treating organizational funds as personal funds, manipulating accounting to skew formula-based outcomes, inflating compensation, withholding profits, diverting business opportunities, or misusing confidential information.

For forensic accountants, the task is not to declare that a breach occurred, but to recognize these recurring patterns, follow the money, document the paper trail, and present unbiased analyses that help the court understand what happened and why it matters.

[1] https://www.hutchesonbowers.com/wp-content/uploads/sites/1603269/2016/05/Moonlighting-Employee.pdf

[2] Ward v. Taggart, 51 Cal. 2d 736, 336 P.2d 534 (1959). (“Ward v. Taggart”).

[3] Ward v. Taggart; Ellison v. Alley, 842 S.W.2d 605 (Tenn. 1992) (“Ellison v. Alley”); Lestoque v. M.R. Mansfield Realty, Inc., 36 Cal. 3d 157, 680 P.2d 1230 (1984) (“Lestoque v. M.R. Mansfield Realty”).

[4] Ward v. Taggart; Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st Cir. 1996) (“Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard”).

[5] Ward v. Taggart.

[6] Ellison v. Alley; Lestoque v. M.R. Mansfield Realty.

[7] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard; Guajardo v. Hitt, 296 S.W.3d 693 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (“Guajardo v. Hitt”).

[8] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard; Guajardo v. Hitt.

[9] Guajardo v. Hitt.

[10] Saden v. Smith, 415 S.W.3d 450 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (“Saden v. Smith”).

[11] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard.

[12] Saden v. Smith.

[13] Ibid.

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010) (“ERI Consulting Engineers, Inc. v. Swinnea”).

[19] Saden v. Smith.

[20] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard.

[21] Guajardo v. Hitt.

[22] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard; ERI Consulting Engineers, Inc. v. Swinnea.

[23] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard.

[24] Advanced Nano Coatings, Inc. v. Hanafin, 478 F. App’x 838 (5th Cir. 2012). (“Advanced Nano Coatings, Inc. v. Hanafin”).

[25] Advanced Nano Coatings, Inc. v. Hanafin; ERI Consulting Engineers, Inc. v. Swinnea.

[26] Advanced Nano Coatings, Inc. v. Hanafin.

[27] ERI Consulting Engineers, Inc. v. Swinnea.

[28] Ibid.

[29] Ibid.

[30] Advanced Nano Coatings, Inc. v. Hanafin.

[31] Ibid.

[32] Advanced Nano Coatings, Inc. v. Hanafin; ERI Consulting Engineers, Inc. v. Swinnea.

[33] Advanced Nano Coatings, Inc. v. Hanafin.

[34] Ward v. Taggart; ERI Consulting Engineers, Inc. v. Swinnea.

[35] https://www.fiduciarylawblog.com/wp-content/uploads/2014/11/Restatement-801.pdf#:~:text=,1992%29

[36] https://supreme.justia.com/cases/federal/us/444/507/

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Miranda Kishel, MBA, CVA, CBEC, MAFF, MSTCA, a Manager at Gould & Pakter Associates, LLC, supports the completion of business valuations, business calculations, forensic accounting, economic damages, and asset tracing engagements, focusing on in-depth financial analysis including modeling, forecasting, research, and report preparation. Her previous experience lies in small business consulting, commercial lending, accounting, real estate development, and economic development.

Ms. Kishel may be contacted at (218) 404-4877 or by e-mail to mkishel@litcpa.com.