Editor: Roby B. Sawyers, CPA, Ph.D.
One of the pillars of a member's responsibilities is to maintain objectivity. To do this, the member must avoid conflicts of interest. The term "conflict of interest" refers to a situation in which two or more parties have a competing interest that would make it difficult for the member to fulfill his or her duties fairly. In order to maintain the public trust and promote integrity and objectivity in the delivery of services, a member should be familiar with the conflict-of-interest standards governing the profession and understand how to address these situations when they arise.
The AICPA Tax Practice Responsibilities Committee is updating its Guidelines for Conflicts of Interest in the Performance of Tax Services (the Guidelines) to help members in this regard. The original Guidelines were published in May 2015 and were limited to conflicts of interest in the performance of federal tax services. The Guidelines are being updated to expand the analysis to tax services in general.
This column briefly summarizes the updated Guidelines.Standards on conflicts of interest
The AICPA Code of Professional Conduct (the AICPA Code) requires that when performing 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" (ET §1.100.001, ¶1). The AICPA Code goes on to explain that in determining whether there is a conflict of interest, a member "should use professional judgment, taking into account whether a reasonable and informed third party who is aware of the relevant information would conclude that a conflict of interest exists" (ET §1.110.010, ¶1).
Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), Section 10.29, "Conflicting Interests," generally prohibits a tax practitioner from representing a client before the IRS if the representation involves a conflict of interest.
The AICPA Code and Circular 230 differ in several ways. First, the AICPA standard is closely related to rules concerning independence, and it refers to the perception of a client, employer, or other appropriate party of the member's impaired objectivity. The Circular 230 rule makes no reference to the perception of others. Second, the AICPA standard expressly encompasses conflicts arising from client relationships with other members of the same firm, while the Circular 230 rule does not. Third, both the AICPA standard and the Circular 230 rule contemplate the waiver of conflicts by affected parties, but only the Circular 230 rule requires a waiver to be in writing. However, it would be prudent to have written consents and waivers for all tax matters, not just federal tax matters under Circular 230. Documentation of waivers should be retained in the member's files.
When providing services on federal tax matters, members must consider both the AICPA Code and Circular 230 in determining whether a conflict of interest does or could exist. Thus, the practitioner must evaluate whether:
- One client's interests are directly adverse to another client's interests;
- There is a significant risk that the services to a client would be materially limited by the responsibility to provide services to another client (either current or former), to another person, or by the interest of the member or the member's firm; or
- A client or other appropriate party could consider the member's objectivity impaired because of the client relationships that each holds with the member or the member's firm.
The Guidelines are limited to an analysis of the AICPA Code and Treasury Circular 230. They do not discuss SEC or PCAOB rules concerning independence or state board of accountancy rules relating to independence and conflicts of interest. While the Guidelines do not address these rules, members must also take them into account.Identifying a conflict of interest
Under the Guidelines, to determine whether an actual or potential conflict of interest exists, a member firm should adopt reasonable procedures appropriate for the size and type of firm and its practice. Ignorance caused by a failure to institute such procedures may not excuse the member's violation of Circular 230, Section 10.29. Moreover, Sections 10.33(b) and 10.36 of Circular 230 make tax leaders within a firm responsible for establishing procedures that ensure firm members comply with rules.
It seems that, at a minimum, each firm should have in place a process by which a member can determine whether services sought by a potential or current client may be considered adverse to the interests of a current or former client or whether another professional within the member's firm has a personal conflict with the proposed client or service. Larger firms will likely require more robust and comprehensive systems to manage conflicts and independence checks. When determining whether a conflict exists, members should be sensitive to the rules regarding the confidentiality of the taxpayer's information under Secs. 6713 and 7216 of the Internal Revenue Code and the AICPA Code's "Confidential Client Information Rule" (ET §1.700.001).
In some cases, an existing or potential conflict may be identified before the engagement is undertaken. In that case, the engagement should be declined unless the member believes the conflict can be properly managed and the member obtains the appropriate informed consent or waiver of each affected client.
In other cases, a conflict may arise during an engagement from unforeseeable developments, such as changes in the client's corporate or organization affiliations or a conflict between spouses for whom the practitioner has prepared a joint return. In those cases, the engagement can continue only after the member believes the conflict can be properly managed and has obtained the appropriate informed consent or waiver of all affected clients.Conflicts among current clients
The Guidelines classify conflicts among current clients into three broad categories: transactional conflicts, relational conflicts, and adversarial conflicts.
Transactional conflicts may occur when a member or firm is asked to provide services to two or more clients who are directly or indirectly involved with the same transaction. For example, a member may be asked to represent the seller of a business that is negotiating with a buyer that is also a client of the member or the member's firm.
Relational conflicts may arise because of relationships that exist among clients. For example, a member may have prepared a joint return for spouses in past years, but the couple filed for divorce during the current tax year. To the extent that the divorce is, or may become, adversarial, each spouse, or both, could view the member's objectivity to be impaired because of the client relationship that the member holds with the other. It is also possible that the manner in which an item is reported on the tax return of one spouse is directly adverse to the other spouse's interests. Thus, it seems likely that a member, or members within the same firm, could not prepare returns for spouses undergoing an adversarial separation or divorce without obtaining written consents from both spouses.
Adversarial conflicts may arise when clients of the same member or member's firm are adversaries. Consider the situation where the IRS is challenging an item on a joint return for a husband and wife. One spouse may have a defense to the detriment of the other spouse, such as an innocent spouse claim. If one spouse asserts an innocent spouse defense, it seems that it may be impossible for a single member to represent both spouses competently and diligently. In that case a member could not represent the interests of both, even if the spouses were to provide written consents.Conflicts with former clients
A member's responsibility not to disclose confidential client information without the specific consent of the client, as set forth in the AICPA Code's "Confidential Client Information Rule," continues after the engagement is over and after the taxpayer is no longer a client. This duty of confidentiality to former clients may give rise to a conflict of interest with new services to different clients of that member. A member's duty to protect the confidentiality of a former client continues after that member moves from one firm to another, since clients of the new firm might be unduly advantaged by the member's knowledge at the prior firm.Conflicts with a member's own interests
In addition to conflicts with current or former clients, a member's duties of integrity and objectivity may be materially limited by the member's own interests. For example, a client may request that a member assist it with an IRS exam of a tax return prepared by that member. Typically, at the outset of an IRS exam, the client's and the member's interests are aligned. Suppose, however, an issue arises in the exam that calls into question the member's work in preparing the return under exam. The member's interest in defending his or her work may conflict with obtaining the best outcome for the client. If the diverging interests are such that the member can no longer competently and diligently represent the client in the exam, or a third party could be expected to conclude that the member's integrity and objectivity are compromised, the member must withdraw from the engagement.Resolving a conflict of interest
The AICPA Code provides several examples of safeguards that may be effective to eliminate a conflict-of-interest threat or reduce it to an acceptable level (ET §1.110.010, ¶10):
a. Implementing mechanisms to prevent unauthorized disclosure of confidential information when performing professional services related to a particular matter for two or more clients whose interests with respect to that matter are in conflict. This could include
i. using separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality;
ii. creating separate areas of practice for specialty functions within the firm, which may act as a barrier to the passing of confidential client information from one practice area to another within a firm;
iii. establishing policies and procedures to limit access to client files, the use of confidentiality agreements signed by employees and partners of the firm and the physical and electronic separation of confidential information.
b. Regularly reviewing the application of safeguards by a senior individual not involved with the client engagement or engagements.
c. Having a member of the firm who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgments and conclusions are appropriate.
d. Consulting with third parties, such as a professional body, legal counsel, or another professional accountant.
Most important, to resolve an actual or potential conflict of interest, the member must first decide whether he or she believes that he or she can perform the service competently and diligently. The member must also consider whether a reasonable and informed third party, knowing the threats and safeguards, would be expected to conclude that the member's integrity and objectivity are not compromised. If the member determines that these tests have been met, the affected clients still must be informed of the nature of the conflict and provide advance consent to having the services performed despite the actual or possible conflict of interest. Three samples of conflict waivers are included in the Guidelines.
|Anna Seto, CPA, is a managing director at KPMG LLP in New York. Joseph Tapajna, CPA, is an adjunct professor in the Mendoza College of Business at the University of Notre Dame. Roby B. Sawyers, CPA, Ph.D., is a professor of taxation and accounting in the Department of Accounting, Poole College of Management at North Carolina State University. All are members of the AICPA Tax Practice Responsibilities Committee. For more information about this column, contact firstname.lastname@example.org.