What Is Fiduciary Accounting?
Fiduciary accounting defies easy definition, probably because this brand of accounting can include so many seemingly disparate elements. In the broadest sense, it can mean the entire process wherein a fiduciary—normally a personal representative, trustee or guardian—communicates information on an ongoing basis regarding the financial administration of a fund to the parties in interest and, perhaps, to a court. This information is also used to support the fiduciary’s administration of the fund. In another sense, it may be the process whereby a fiduciary—here more often a trustee—periodically keeps the principals informed of transactions and investment policies being followed.
Because fiduciary accounting can come under scrutiny from the IRS or the courts, precision, accuracy, and careful documentation are absolutely necessary, as is specific knowledge of any accounting protocols which apply to the fund in question.
The Six Principles of Fiduciary Accounting
1. Accounts should be stated in a clear manner that is transparent to people who are not familiar with practices and terminology peculiar to the administration of estates and trusts.
2. A fiduciary account shall begin with a concise summary of its purpose and content.
3. A fiduciary account shall contain sufficient information to put the interested parties on notice as to all significant transactions affecting administration during the accounting period.
4. A fiduciary account shall include both carrying values—representing the value of assets at acquisition by the fiduciary—and current values at the beginning and end of the accounting period.
5. Gains and losses incurred during the accounting period should be shown separately in the same schedule.
6. The account should document significant transactions that do not affect the amount for which the fiduciary is responsible.
Due its sensitive nature, fiduciary accounting should be performed by a CPA or the equivalent. Regardless, your accountant/accounting service should be able to draw upon institutional knowledge of fiduciary accounting. It makes sense to entrust this specialized work to someone who has a proven track record.
