Case Title: Michael A. Duncan v. State Board of Accountancy Challenges administrative decision re conflict of interest

Citation: 

Docket Number: 35804

State: idaho

Court: Idaho Supreme Court (civil)

Date: 2010-04-23T00:00:00Z

Document:
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IN THE SUPREME COURT OF THE STATE OF IDAHO 
 
Docket No. 35804 
 
 
MICHAEL A. DUNCAN, 
       Petitioner-Appellant, 
v. 
STATE BOARD OF ACCOUNTANCY, 
       Respondent. 
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Lewiston, April 2010 Term 
 
2010 Opinion No. 46 
 
Filed:  April 23, 2010 
 
Stephen W. Kenyon, Clerk 
 
Appeal from the District Court of the Second Judicial District of the State of 
Idaho, Nez Perce County. Honorable Carl B. Kerrick, District Judge. 
 
 
The decision of the district court is affirmed.  
 
Clark & Feeney, Lewiston, for appellant. Paul Thomas Clark argued. 
 
Moffatt, Thomas, Barrett, Rock & Fields, Chartered, Boise, for respondent.  Larry 
C. Hunter argued.  
 
J. JONES, Justice.  
 
 
Michael A. Duncan appeals from the decision of the district court affirming the ruling of 
the Idaho State Board of Accountancy. We affirm.  
I.  
 
Duncan had prepared tax returns for Randy and Evelyn Forsmann since 2001. After 
Duncan’s firm, Sellman & Duncan, PLLC, did the initial preparation of the Forsmanns’ 2003 tax 
return, Duncan was contacted by Evelyn Forsmann on April 28, 2004. Evelyn asked Duncan to 
recommend a divorce attorney. At some point in May 2004, Duncan formed a personal 
relationship with Evelyn that developed during the course of the Forsmanns’ divorce. The 
Forsmanns’ divorce became final on August 13, 2004. Although Duncan alleges that all 
substantive work on the return was completed prior to his relationship with Evelyn, an extension 
was filed during the relationship, and the return itself was not filed until after the divorce. A 
letter regarding the extension was sent from Duncan’s firm to Randy Forsmann on August 11, 
2004, with Duncan listed as the contact person. It also appears that a substantive review of the 
 
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return was completed prior to its filing in September 2004. In addition, a letter signed by Duncan 
was sent to the Forsmanns regarding their return on September 9, 2004. A completed return was 
eventually filed.  
Randy Forsmann filed a verified complaint with the Idaho State Board of Accountancy. 
The complaint alleged that Duncan continued to work on a joint tax return for Randy and Evelyn 
after Duncan became aware that they were seeking a divorce and after Duncan began a personal 
relationship with Evelyn. Randy alleged that Duncan’s relationship with Evelyn constituted a 
conflict of interest in violation of American Institute of Certified Public Accountants (AICPA) 
Rule 102.3 and Idaho Administrative Rule 01.01.01.004.001. A hearing was held before the 
State Board of Accountancy. The Board issued Findings of Fact, Conclusions of Law, and Final 
Order holding that Duncan had a conflict of interest that he failed to disclose as required by 
AICPA Rule 102.3. As a result, the Board ordered Duncan to pay $1,000 in administrative 
penalties, $2,000 in administrative costs, and to undergo four hours of ethics training. Duncan 
filed a petition for judicial review of the Board’s decision. Duncan also filed a motion to dismiss 
the proceedings based upon the Board’s failure to prepare a complete transcript of the 
administrative hearing. The district court denied the motion to dismiss and affirmed the Board’s 
findings. The district court found that Duncan’s challenge was simply a request for new findings 
of fact by the court, that the Board’s findings were supported by substantial evidence, and that 
Duncan had failed to demonstrate prejudice. Duncan then appealed to this Court.  
II. 
Issues on Appeal 
 
The following issues are presented on appeal: (1) whether the district court erred in 
refusing to overturn the Board’s decision and (2) whether the Board is entitled to attorney fees on 
appeal.  
III. 
A. 
 
The district court reviewed the Board’s decision in its appellate capacity pursuant to 
Idaho Code sections 54-224 and 67-5279. When the district court acts in its appellate capacity, 
this Court reviews the record independently. Cooper v. Bd. of Prof’l Discipline, 134 Idaho 449, 
454, 4 P.3d 561, 566 (2000). We will defer to the Board’s findings of fact unless they are clearly 
erroneous and unsupported by evidence in the record. Id.  
 
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The actions of an agency like the Board are afforded a strong presumption of validity. Id.  
This Court may not substitute its judgment for that of the Board. Id. The Board’s decision may 
be overturned if it: “(a) violate[s] constitutional or statutory provisions;  (b) exceed[s] the 
agency’s statutory authority;  (c) [is] made upon unlawful procedure;  (d) [is] not supported by 
substantial evidence on the record as a whole;  or (e) [is] arbitrary, capricious, or an abuse of 
discretion.” Id. (citing I.C. § 67-5279(3)). Further, the Board’s decision will be upheld unless the 
appellant demonstrates that one of his substantial rights has been prejudiced. Id. (citing I.C. § 67-
5279(4)).  
Where an agency interprets a statute or rule, this Court applies a four-pronged test to 
determine the appropriate level of deference to the agency interpretation. This Court must 
determine whether: (1) the agency is responsible for administration of the rule in issue; (2) the 
agency’s construction is reasonable; (3) the language of the rule does not expressly treat the 
matter at issue; and (4) any of the rationales underlying the rule of agency deference are present. 
Preston v. Idaho State Tax Comm’n, 131 Idaho 502, 504, 960 P.2d 185, 187 (1998). There are 
five rationales underlying the rule of deference: (1) that a practical interpretation of the rule 
exists; (2) the presumption of legislative acquiescence; (3) reliance on the agency’s expertise in 
interpretation of the rule; (4) the rationale of repose; and (5) the requirement of contemporaneous 
agency interpretation. Id. at 505, 960 P.2d at 188.  
B. 
 
Duncan argues that this Court should overturn the Board’s findings because the Board 
added additional elements to Rule 102.3. Specifically, Duncan argues that Rule 102.3 does not 
require an accountant to disclose a conflict of interest when all parties are already aware of it. 
Additionally, Duncan argues that the Board erroneously relied on one of the comments to Rule 
102.3 relating to divorce because he was not giving tax or financial planning advice to the 
Forsmanns. Finally, Duncan argues that he cannot have violated Rule 102.3 because he 
performed no substantive work after the time when the conflict arose and, even if he had, that the 
work would not have changed in any way as a result of the conflict because the return was 
entirely concerned with events that transpired before the conflict arose.  
The Board argues that this Court should reject Duncan’s arguments because disclosure is 
required by the plain language of the Rule and the Board’s findings demonstrate that Duncan did 
not make the required disclosure. The Board also argues that even though both parties may have 
 
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been aware of the conflict, there was no demonstration that Randy consented to Duncan’s 
continued representation in spite of the conflict. Finally, the Board argues that the relationship 
between Duncan and Evelyn clearly constituted a conflict within the meaning of the Rule that 
must have been disclosed.  
Duncan’s key contention is that this Court should not give deference to the Board’s 
interpretation of AICPA Rule 102.3 because it is unreasonable. Rule 102.3 provides:  
A conflict of interest may occur if a member performs a professional 
service for a client or employer and the member or his or her firm has a 
relationship with another person, entity, product, or service that could, in the 
member’s professional judgment, be viewed by the client, employer, or other 
appropriate parties as impairing the member’s objectivity. If the member believes 
that the professional service can be performed with objectivity, and the 
relationship is disclosed to and consent is obtained from such client, employer, or 
other appropriate parties, the rule shall not operate to prohibit the performance of 
the professional service. When making the disclosure, the member should consider 
Rule 301, Confidential Client Information.  
 
CODE OF PROF’L CONDUCT RULE 102.3 (Am. Inst. of Certified Public Accountants 2006) 
(emphasis added). Rule 102.3 is applied to Idaho accountants by the Idaho Administrative Code. 
Idaho Admin. Code sec. 01.01.01.004.001. An agency interpretation of a rule or statute is 
unreasonable when it “is so obscure or doubtful that it is entitled to no weight or consideration.” 
Preston, 131 Idaho at 505, 960 P.2d at 188 (quoting J.R. Simplot Co. v. Idaho State Tax 
Comm’n, 120 Idaho 849, 862, 820 P.2d 1206, 1219 (1991)). Generally, we have found agency 
interpretations reasonable unless the agency relied on erroneous facts or law in its determination. 
See, e.g., Farber v. Idaho State Ins. Fund, 147 Idaho 307, 313, 209 P.3d 289, 295 (2009) (finding 
an interpretation unreasonable because the Department of Insurance erroneously relied on 
practices from other states that did not have the same statute as the one enacted in Idaho); Farrell 
v. Whiteman, 146 Idaho 604, 610–11, 200 P.3d 1153, 1159–60 (2009) (rejecting an agency 
interpretation provided in an amicus brief because it was contrary to the language of the statute 
and the situation in question was provided for by the language of the statute). Normally, this 
Court defers to the agency interpretation of statutes and rules. See, e.g., Canty v. Idaho State Tax 
Comm’n, 138 Idaho 178, 183, 59 P.3d 983, 989 (2002); Simplot, 120 Idaho at 863, 820 P.2d at 
1220.  
 
The Board is charged with the adoption and enforcement of standards of professional 
conduct to govern accountants. I.C. § 54-204. Under this authority, the Board adopted AICPA 
 
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Rule 102.3 by Idaho Administrative Rule 01.01.01.004.001. Idaho Admin. Code sec. 
01.01.01.004.001. Accordingly, the Board was entitled to apply the Rule to Duncan’s behavior, 
which it did, finding that Duncan had a duty to disclose the conflict that arose from the 
Forsmanns’ divorce and his subsequent personal relationship with Evelyn, and that he failed to 
make the required disclosure or obtain consent from either party. Duncan has made no showing 
that the Board’s reading of the Rule is unreasonable, nor that its findings of fact are erroneous.  
 
In his testimony before the Board, Duncan admitted that he recognized the Forsmann 
situation as a conflict of interest beginning on April 28, 2004.  Duncan also admitted that he did 
not provide notice of the conflict to Randy because Duncan believed Randy already knew of the 
conflict. Further, testimony and evidence were provided to the Board that additional services, 
however minimal, were provided to the Forsmanns after April 28, 2004, when the conflict arose. 
The Board recognized Duncan’s arguments in its findings, but ultimately held that Duncan was 
required to either terminate services or disclose the conflict to both parties and obtain their 
consent for the continued provision of tax services. The Board’s conclusions were based on its 
finding that the Rule did not create an exception from disclosure in a situation where the clients 
were aware of the conflict. The Board also concluded that the actions taken by Duncan after 
April 28, 2004, constituted tax services within the meaning of the Rule.  
The Board’s interpretation of the rule is reasonable. The language of the Rule clearly 
states that disclosure must be made and consent obtained before services are continued in the 
face of a conflict. CODE OF PROF’L CONDUCT RULE 102.3 (Am. Inst. of Certified Public 
Accountants 2006). In addition, the language “when making the disclosure, the member should 
consider Rule 301,” indicates that the duty to disclose is on the accountant and that the 
accountant is not free to assume that the parties are aware of the conflict and have impliedly 
consented to continued service. CODE OF PROF’L CONDUCT RULE 102.3 (Am. Inst. of Certified 
Public Accountants 2006). Further, the Board’s reading of the rule is consistent with sound 
public policy. If the accountant were allowed to make the determination that the parties knew or 
may have known of his conflict, the client is at the accountant’s mercy, dependent on the 
accountant’s subjective understanding of the client’s thoughts and concerns. Professional 
standards should not be dependent on the accountant’s subjective understanding of what he may 
think the client understands. The Board’s reasoning is quite similar to the reasoning we apply in 
the agency law context, under the theory that the principal is presumed not to have knowledge of 
 
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acts or interests of the agent that may constitute a conflict of interest because the burden of 
disclosure of the conflict is on the agent. See Melgard v. Moscow Idaho Seed Co., 73 Idaho 265, 
273, 251 P.2d 546, 552 (1952). Here, because the burden of disclosure is on the accountant, it is 
not unreasonable for the Board to decide that the accountant is not entitled to assume knowledge 
of the conflict.  
Deference to the Board’s interpretation is also supported by the Preston rationales for 
agency deference, which provide no compelling reason to deviate from the Board’s 
interpretation. First, as noted above, the Legislature has recognized the need for practical 
standards to govern professional conduct and the Board’s interpretation provides such a standard. 
Second, because the Board is empowered by the Legislature to adopt professional standards, the 
Legislature has presumably acquiesced in the Board’s interpretation of Rule 102.3. Third, 
because the Board is composed of accounting professionals, it is reasonable to rely on their 
expertise in determining appropriate conflict procedure. Fourth, requiring affirmative disclosure 
by the accountant and assent by the client serves the rationale of repose, preventing a potential 
conflict from hanging over the parties’ heads while the accountant makes an attempt to ascertain 
whether the conflict was discovered and impliedly acquiesced in by the clients.1 Thus, the 
rationales, as a whole, support deference to the Board’s interpretation of the Rule, particularly in 
light of the fact that no compelling showing was made to demonstrate that the interpretation was 
in error.  
As a result, because the Board’s interpretation is reasonable, employing a rationale 
previously used by this Court, and no compelling reason is presented to depart from it, the 
district court correctly denied Duncan’s petition for judicial review.  
C. 
The Board argues that it is entitled to attorney fees pursuant to Idaho Code section 12-
121 and I.R.C.P. 54(e)(1). “Attorney fees can be awarded under [section 12-121] only if the 
appeal was brought or defended frivolously, unreasonably, or without foundation.” Farr West 
Investments v. Topaz Marketing, L.P., 148 Idaho 272, 277, 220 P.3d 1091, 1096 (2009). The 
statute does not, however, authorize an award of attorney fees on appeal of an agency ruling. 
Cheung v. Pena, 143 Idaho 30, 36, 137 P.3d 417, 423 (2006). Furthermore, I.A.R. 35(b)(5) 
                                                 
1 The fifth rationale is inapplicable in this matter because this case deals with a regulation adopted by the Board 
rather than a statute adopted by another body that would need to be interpreted by the Board. 
 
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requires a respondent seeking attorney fees to designate entitlement to fees as an additional issue 
on appeal. I.A.R. 35(b)(5); see also Independence Lead Mines v. Hecla Mining Co., 143 Idaho 
22, 29, 137 P.3d 409, 416 (2006). The Board does not list attorney fees as an additional issue on 
appeal, nor does it cite to a statutory provision that demonstrates its entitlement to attorney fees, 
even though there are arguably grounds to award fees under Idaho Code section 12-117. Thus, 
the Board is not entitled to attorney fees on appeal.   
IV. 
 
 
Because Duncan has failed to demonstrate that the Board’s decision was clearly 
erroneous or that he was prejudiced in a substantial right, the decision of the district court is 
affirmed. The Board is awarded costs, but no attorney fees, on appeal.  
  
 
Chief Justice EISMANN, and Justices BURDICK, W. JONES, and Justice Pro Tem 
REINHARDT, CONCUR.