it comes to conflict of interest, most certified public accountants
(CPAs) feel confident that they would know it if they saw it. But when
asked to define what constitutes a conflict of interest, CPAs often
struggle to find the right words or provide a consistent response. While
being able to recite a definition may not be an effective strategy to
avoid an actual or potential conflict of interest, it can assist in
confronting possible conflict situations and represent an initial step
in adopting appropriate risk management practices.
Defining a Conflict of Interest
Black’s Law Dictionary provides two definitions of conflict of interest –
- A real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties.
real or seeming incompatibility between the interests of two of a
lawyer’s clients, such that the lawyer is disqualified from representing
both clients if the dual representation adversely affects either client
or if the clients do not consent.
these definitions apply to the legal profession, they also are relevant
to the duties of a CPA in the practice of public accounting. Certainly
an accountant can encounter situations where his/her own professional
interest conflicts with the best interest of a client. An accountant
also may be asked to provide services to two clients in a situation
where the clients have competing interests that render the relationship
incompatible. A common situation may involve both clients seeking tax
advice regarding a prospective transaction between them.
American Institute of Certified Public Accountants (AICPA) professional
standards take a slightly different approach to describing conflict of
interest. The Code of Professional Conduct (ET Section 102.02) describes a conflict of interest as follows:
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
Certain professional engagements, such as
audits, reviews, and other attest services, require independence.
Independence impairments under rule 101 [ET Section 101.01], its
interpretations, and rulings cannot be eliminated by such disclosure and
Although these two approaches are substantively similar, they may be distinguished by the express reference to objectivity and, where required, independence in the AICPA’s Code of Professional Conduct.
For the CPA, objectivity is -
state of mind, a quality that lends value to a member’s services. It is
a distinguishing feature of the profession. The principle of
objectivity imposes the obligation to be impartial, intellectually
honest, and free of conflicts of interest. Independence precludes
relationships that may appear to impair a member’s objectivity in
rendering attestation services . . .
For a member in
public practice, the maintenance of objectivity and independence
requires a continuing assessment of client relationships and public
responsibility. Such a member who provides auditing and other
attestation services should be independent in fact and appearance. In
providing all other services, a member should maintain objectivity and
avoid conflicts of interest. (AICPA Professional Standards, ET Section
The ability to provide service with objectivity and,
where required, independence, also applies to CPAs in evaluating
professional relationships for conflicts of interest.
of accountancy, regulatory agencies and professional organizations
address conflict of interest in governing standards, rules and
regulations. Allegations of engaging in a conflict of interest can lead
to disciplinary action, including fines, suspension and even revocation
of practice privileges.
In situations where a malpractice claim
results in a trial, a plaintiff’s attorney may exploit a conflict of
interest, regardless of whether the conflict caused damage to the
plaintiff. While juries have difficulty following the complexities of
alleged accounting malpractice claims, they readily comprehend conflicts
of interest. Juries have, of course, been exposed to such conflicts,
which have been frequently alleged against politicians and other public
servants, and are aware of the pervasive nature. When a conflict exists,
it tends to adversely influence the judgment of juries regarding the
facts subject to dispute.
Conflict Situations for CPAs
that present potential conflicts of interest are seen frequently in
accounting malpractice claims. For example, a CPA provides:
and financial planning advice, and prepares income tax returns for a
married couple. The couple initiates a divorce proceeding, and the CPA
continues to provide these services to both of them as individual
clients. After the divorce, the ex-wife alleges that the CPA provided
tax advice to the ex-husband that caused her to pay excessive taxes in
the year the divorce was finalized.
- Tax planning, estate
planning and tax return preparation services to a married couple, and
prepares tax returns for two of their four adult children. The CPA also
agrees to serve as the trustee of a family trust established for the
benefit of the four children. After the couple’s death, the CPA must
manage and distribute the assets of the trust (including the family
business now run by one of the children) while providing tax advice for
the two children who are continuing clients. The non-client trust
beneficiaries allege that the CPA favored the interests of the children
who were continuing clients over their interests in managing and
distributing the assets of the trust.
- Consulting advice
to a real estate venture contemplating an acquisition, while owning a
small interest in this business. The CPA recommends the venture as an
investment to several of her other high net worth clients, but does not
disclose to them that she has an ownership interest in the business. The
venture fails, and one of these clients sues the CPA, alleging that she
provided negligent investment advice, had an undisclosed conflict of
interest, and engaged in self-dealing.
statement review and tax return preparation services to a manufacturing
client. Another client requests that the CPA provide assistance in
negotiating the purchase of real estate from the manufacturing company
client. The CPA assists the purchaser in negotiating the terms of the
sale, and concludes that this is not a problem because the seller is
aware that the CPA represents the purchaser in the negotiations. The
seller later sues the CPA firm, alleging that the CPA disclosed
confidential client information to the purchaser used to negotiate more
favorable terms for the sale.
- Tax planning and tax return
preparation services to a partnership of doctors, and individually to
one of the three partners. A dispute arises between two of the partners,
leading to the decision that two of them will buy out the interests of
the third. At the request of one of the two partners planning the
buyout, the CPA performs a valuation engagement, which is used in
setting a price. Although all three partners are aware of the fact that
the CPA was engaged by one of the partners to perform the engagement,
the CPA does not obtain signed consents from the partners to perform the
engagement notwithstanding the existence of the conflict. The sale is
concluded. A year later, the selling partner files suit against his
former partners and the CPA, alleging that he did not consent to allow
the CPA to perform the service, and that the CPA favored the interests
of the other partners in preparing the valuation report in order to
retain the business as a client.
Managing Conflict Risk
firm personnel must be vigilant in identifying relationships and
situations that could be viewed by others as presenting a conflict of
interest. All firm personnel should receive training on the subject.
Staff professionals should be instructed to immediately bring potential
conflict situations to the attention of firm management.
In order to
avoid potential and actual conflicts of interest, client and engagement
screening procedures should be implemented. Knowing the potential client
is critical. Firms should inquire about the prospective client’s major
business relationships, such as key clients, lenders and vendors.
Determine the intended use of the proposed service and distribution of
the related workproduct, if applicable. If there will be third party
users, identify known users and determine if the CPA firm has
professional relationships with the users that present an actual or
potential conflict. Also recognize that providing professional services
to individuals employed by business clients can lead to conflicts of
interest. Carefully consider the ramifications prior to agreeing to
provide new services to these individuals.
But the process does not
end there. A client’s business and its business relationships change
over time. Evaluating client relationships for conflicts should remain
an ongoing process, rather than confined to an annual client continuance
Client Data Base
All firms should maintain a
database of client information. New clients should be added to the
database when the client relationship is established. The database
should be routinely updated as information changes.
should be user-friendly and readily accessible. Any system, however, is
only helpful if it is properly maintained. The firm’s quality control
procedures should specify the responsibility of firm personnel to
transmit current information to those assigned to its maintenance. In
addition, compliance with this requirement should be monitored.
Conflict of Interest Questionnaires
and actual conflicts of interest can develop through employment and
ownership relationships resulting from the activities of CPA firm
employees, owners, and their family members. A firm should require all
employees and owners to complete and submit conflict of interest
questionnaires to management on an annual basis. The information
provided should be compared with information in the client database. If
an actual or potential conflict of interest is identified, it should be
disclosed to affected clients.
Potential conflicts should be
disclosed before they become actual conflicts. Explain to clients
obligations under applicable professional standards and regulations
regarding conflicts of interest. While in some cases obtaining conflict
waivers from affected clients may be an acceptable solution, in other
cases withdrawal from the engagement may be required. Consult with
competent legal counsel for assistance in drafting both conflict of
interest questionnaires and conflict waivers enforceable under
must be committed to avoiding conflicts of interest while providing
clients with quality, professional services. Vigilance in identifying
potential conflicts and remaining objective in evaluating them
represents an essential element of risk management.
Updated September 2012
Accountants Professional Liability Risk Control, CNA, 333 South Wabash Ave., 36S Chicago, IL 60604.
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