Conflicts of interest can arise in any profession, and CPA firms are no exception. Although the AICPA has always recognized the possibility of a conflict of interest in the accountancy profession, what constitutes a conflict of interest has not been clearly defined. They have taken steps to correct this, offering a revised code on conflicts that may arise, with expanded guidance for CPAs in public practice as well as those in private business.
The current AICPA framework consists of three distinct areas:
- Identify the conflict – Ideally, this should be done before a new client engagement is accepted. This includes considering the nature of the services the client is interested in, all parties involved, and whether accepting the engagement may cause conflict with other clients or within the business itself.
- Assess the conflict – Once a conflict has been identified, it is important that the necessary steps are taken to assess the conflict and whether there are appropriate safeguards that can be put in place to help mitigate any potential threat. If a threat is deemed likely, it must be reduced or eliminated. This can be done in a variety of ways, including confidentiality agreements, limiting access to confidential documents within the firm, independent third-party oversight of the engagement, or denial of the engagement.
- Consider Disclosure and Consent Issues – If a conflict is present, you must disclose details of the potential conflict and the nature of any issues that may arise. Once the client has been notified, it is up to them to determine if they wish to proceed with the assignment. Consent must be provided in writing to the company. If the client neither consents nor refuses, it is important that the requested services are not performed.
Unfortunately, it is not always clear before an engagement that a conflict of interest exists. If so, the conflict should be mitigated by either terminating the existing agreement or removing the circumstances surrounding the conflict.
These are just a few examples of potential conflicts of interest that may require further investigation:
- Your client comes to you for advice on likely new investment opportunities. They are interested in a new start-up business that clearly matches their investment goals and interests. The only problem is that you are one of the first investors in this same startup.
- The Smiths have been your clients for years, providing everything from asset valuation to financial planning. Now the Smiths are divorcing and both want you to continue providing the same services.
- Client A is interested in acquiring Company B and wants your advice. The only problem is that Client C is also interested in acquiring Company B.
- A current client contacts you with a request for a forensic investigation into a company they believe to be responsible for criminal activity. The only problem is that the company they want to investigate is also one of your customers.
- You have been providing financial services to a small partnership and its two partners for years. Now, each partner wants you to continue providing your current level of service, even if the partnership is about to be dissolved.
All of these situations do not mean that you should not provide services to the client(s) in question, or even that there is a conflict of interest. But all of the above situations require investigation and disclosure of any potential conflicts to your customers.
To reduce the risk that conflicts of interest can pose to your business, be sure to be proactive; identify potential risks and take appropriate action to mitigate the risk. And while some conflicts can be managed with the right safeguards in place, others may be too risky to undertake. But it is only by being aware of these risks and taking the appropriate measures that the appropriate decision can be made.