Co-Editors: Steven F. Holub, CPA, and Mary Cathryn Green, CPA, M. Acc.
CPAs generally feel that they understand the meaning of conflict of interest, but when asked to define the concept they often become less certain. The term “conflict of interest” refers to a situation in which two or more parties have a competing personal or financial interest that would make it difficult for the CPA to fulfill his or her duties fairly. For example, two clients may ask a CPA to provide services in a situation where the clients have competing interests that render the relationship incompatible. There are numerous occasions when a CPA might encounter a conflict, from providing advice on partnership issues to individual partners of a partnership client to representing a husband and wife for years and then trying to provide advice to both of them in a divorce proceeding. In these types of situations, the CPA will likely have a conflict that prevents him or her from fairly representing all the parties.
The AICPA Code of Professional Conduct is clear: “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others” (Code of Professional Conduct Rule 102).
CPAs’ relationships with clients can change over time, and they must realize that they may have to withdraw from an engagement if a conflict develops. This dynamic reinforces why members in public practice must always maintain their objectivity and independence and should continually assess client relationships and their responsibility to those relationships, as well as to all parties in those relationships.
CPAs may find this dilemma more difficult when dealing with a client that pays a large fee. However, they must always take the cashflow out of the equation when assessing conflict of interest relationships.
A CPA may seek consent from clients to represent both parties when there is a conflict, as long as both parties are aware of the conflict and agree to waive their concerns (and the accountant believes that he or she can perform the service with objectivity). If the parties refuse to consent, the CPA cannot continue to represent one of the parties in the matter that has given rise to the conflict, and he or she may be proscribed from representing either party if the prior representation of both parties results in a conflict in representing either party.
Conflicts of interest may arise between the CPA and the client, or they may arise as conflicts between clients, making it important to identify potential conflicts on each engagement at the time it is undertaken. It is also important to annually reevaluate whether conflicts exist when dealing with recurring engagements. Ideally, the accountant should document any identified conflict of interest in writing so that if a problem does arise in the future, the actions taken can be justified.
Who Is the Client?
In order to evaluate potential conflicts of interest, practitioners need to know who their clients are and to whom they owe a duty. According to the AICPA Code of Professional Conduct, “A client is any person or entity other than the member’s employer that engages a member or a member’s firm to perform professional services or a person or entity with respect to which professional services are performed” (Code of Professional Conduct §92.03). The standard for defining conflicts of interest is objectivity. To determine if there is a conflict, a CPA should ask whether a reasonable person would view the CPA-client relationship as impairing objectivity, regardless of the practitioner’s good intentions.
The AICPA insurance program website set up by AON notes that the following situations are examples of conflicts of interest that frequently lead to accounting malpractice claims:
- A CPA provides tax or personal financial planning services for a married couple going through a divorce. If the CPA has provided advice to both parties over a number of years, it will be difficult to continue representing either party during the divorce without having a potential conflict of interest.
- A CPA provides litigation support services for a plaintiff in connection with a lawsuit filed against a client of the CPA’s firm.
- In a personal financial planning engagement, the CPA recommends that the client invest in a business with which the CPA has a financial interest.
- A CPA has a significant financial interest in a company that is a major competitor of another client.
- A CPA provides tax planning and tax return preparation services to a partnership and also represents several of the partners on an individual basis. An argument arises and the partners agree to split up the partnership. The CPA prepares a valuation of the partnership for the split, and a lawsuit is brought against the CPA and the selling partners. The CPA will have problems maintaining that he or she was independent with respect to this transaction.
- A CPA provides tax or personal financial planning services to several people in the same family. If conflict later arises between the family members over interests in assets held in a family trust, the CPA could have a conflict.
- A CPA has a personal relationship with a client spouse while representing both spouses on a joint tax return.
All CPA firm personnel need to be involved in identifying relationships and situations that could be considered conflicts of interest. Firms should train personnel to identify conflicts and to notify other firm members of these conflicts. Personnel should maintain records regarding the existence of conflicts and actions taken, if any.
Avoiding conflicts requires a thorough client engagement screening process. Personnel should inquire about a prospective client’s major business relationships, such as key clients, lenders, and vendors. Personnel should also identify third-party users of the work product in order to determine if there is a conflict. They should be aware that providing personal services to business clients can easily lead to conflicts of interest. All these issues should be carefully considered before accepting new work.
All firms should establish a client data-base in the office so that personnel can more easily determine if conflicts exist. Client databases may be maintained on computer records or in paper format. The AICPA insurance program administered by AON recommends that client databases include the following items:
- Name of client and affiliated entities, including addresses and phone numbers;
- Type of client entity (individual, public/private, not for profit, employee benefit plan, trust, etc.);
- Names of owners, senior officers, and directors, including contact numbers and e-mail addresses;
- Principal banking and investment banking relationships;
- Names of legal counsel and other key advisers;
- Major customers and vendors; and
- Name or office of current engagement partners and types of services to be provided for the client.
An important step in preventing a conflict of interest is to make sure to create systems of policies and procedures to identify potential conflicts. Avoiding conflicts of interest requires CPAs to aggressively identify potential conflicts and take appropriate remedial action, which may mean withdrawing from the engagement. When in doubt, err on the side of caution. Remaining objective in evaluating possible conflicts is the key to limiting risk in the management of a practice.
Steven Holub is a partner in Cherry Bekaert & Holland, LLP, in Tampa, FL, and is former chair of the AICPA Tax Division’s Tax Practice Management Committee. Mary Cathryn Green is with Marcum, LLP, in Bala Cynwyd, PA, and is chair of the Tax Practice Improvement Committee. Kenneth Parker is with Parker & Associates CPAs, PLLC, in Jackson, MS, and is a member of the Tax Practice Improvement Committee. For information about this column, contact Mr. Parker at firstname.lastname@example.org.