- Serious problems can arise if clients do not shift seamlessly between accounting firms.
- Ethical letters are part of a due diligence process for CAs when taking on new clients.
- File transfer complaints over undue delays can arise and result in sanctions.
Failing to facilitate a seamless shift of clients from one firm to another can lead to serious problems, according to the heads of Professional Conduct and Complaints for Chartered Accountants ANZ, Kate Dixon in Australia and Rebecca Stickney in New Zealand.
Before accepting an engagement, the Code of Ethics requires members to determine if there are any reasons why they should not do so. Issuing a professional clearance or ethical letter is one way to help make this decision.
Ethical letters are part of a member’s due diligence process in accepting new appointments to ensure there are no threats to compliance with ethical requirements. Communication is also about professional courtesy and maintaining the calibre of professional service expected of members in practice.
Ethical letters are not mandatory unless part of an audit engagement, but are a matter of common practice. In Australia, APES 110: Code of Ethics for Professional Accountants at AUST210.11.1 contains requirements regarding ethical letters.This also includes a requirement to seek the prospective client’s permission to communicate with the existing auditor.
In New Zealand, under the terms of NZ210.12.1, it is mandatory to seek a prospective client’s permission to communicate with an existing accountant and to send a professional clearance letter, according to Stickney. “If no permission is given from the client, you may need to consider declining the engagement unless you are certain there is a good reason for this,” she says.
In exceptional circumstances, if the new CA is unable to communicate with the client’s current accountant, Stickney advises that they can use reasonable means to obtain information about any possible threats to compliance by seeking information from third parties and doing background checks on senior management or those charged with governance.
Clarity is key
Dixon advises accountants need to be clear in an ethical letter about the records they are seeking. “Also check with the client first so that you know what information they have,” says Dixon.
“If the transition is urgent, you should express why. Former accountants often don’t want to do the transition work because they’re losing a client, it’s time-consuming and it’s unproductive. So, if there is a genuine urgency, it’s best to say so, give a reason and provide a reasonable deadline.”
It often creates acrimony if the new accountant seeks a complete copy of all the records when the documents are already in the hands of the client. The new accountant may request a copy of everything in relation to the particular client and the former accountant will think they have already provided the tax returns to the client and financial statements. So all that is left is the trust deed if they are a trustee, and the work papers. But the new accountant may complain that the client can’t find the tax return.
“So be clear about what the client does and doesn’t have. If you’re asking for further copies, it’s worth acknowledging this,” says Dixon.
Taking months to respond or withholding records without valid reason has resulted in disciplinary sanction
If the outgoing accountant fails to reply to an ethical letter, there may be consequences if a complaint is lodged with CA ANZ.
In Australia, members must reply to professional correspondence or inquiries quickly, she adds. “This includes an ethical letter, even though it’s not mandatory to send one.” For Australian CAs, this is covered in CR3.8: Attention to Correspondence and Enquiries, in the members handbook.
New Zealand accountants also have a mandatory obligation to promptly respond to an ethical clearance letter, according to standards NZ210.12.2 and NZ210.12.3. In their reply, they must set out any reasons why the new accountant shouldn’t accept the appointment.
“Unless there is a legal right to withhold documents, the existing accountant must promptly transfer all documents belonging to the client,” says Stickney. “Although ‘promptly’ is not defined, taking months to respond or withholding records without valid reason has resulted in disciplinary sanction,” she adds.
Both the new and outgoing accountants have confidentiality obligations which must be observed (see paragraphs 210.13–210.14 in both the Australian and New Zealand Codes of Ethics). When the client’s existing accountant provides information, they must do so honestly and unambiguously, as outlined in 210.14, notes Stickney.
The Fundamental Principle of Professional Behaviour from the Code of Ethics also applies.
“The response [from the outgoing accountant] should be professional and factual and limited to the relevant questions,” says Dixon. “It’s not a chance to have a dig at the old client.
“Clients are the masters of their own business and have an indisputable right to choose who they want as their advisers and can discontinue the services of anyone.”
Related: How to handle a complaint
Chartered accountants do get sanctioned and fined and being the subject of a complaint is very stressful, but there are things that you can do.
In Australia, accountants are bound by APES 305: Terms of Engagement to document and communicate their terms of engagement. Other standards related to a specific area of accounting may also apply.
In New Zealand, relevant engagement standards – such as those relating to compilation, valuation or assurance – specify the requirement to document terms of engagement. Even though the Code of Ethics doesn’t explicitly require it, if an accountant doesn’t have an appropriate engagement letter and doesn’t ensure clients know the scope and terms of the engagement, they can be seen as failing to comply with the principle of due care and competence.
“The expectation of the disciplinary bodies is that there are terms of engagement and clients are aware of what they are signing up for,” says Stickney.
Setting good terms of engagement makes for a smoother changeover, says Dixon. “These should deal with the ownership of books and records, the ownership of data files, software subscriptions and liens,” she says. Also make sure billing is up to date and in accordance with the terms of engagement – Australian CAs should see Guidance Note N8 – Fees.
Stickney agrees with Dixon about the elements required for a smooth transition, and adds: “Billing can also come under due care provisions and should be timely.”
Transfer of files
In Australia, the transfer of client files between accounting firms is guided by N1, Books and Records – Ownership, Possession and Disclosure. “Under N1 and the general law, an accountant is entitled to keep their client’s working papers,” says Dixon. “These reports and files don’t need to be provided to the client or the new accountant.”
File transfer complaints often arise. “They’re usually resolved at the Professional Conduct Committee level and sometimes result in sanction, for example where a lien is asserted inappropriately or there had been undue delay in transferring files,” says Dixon.
Outstanding fees are a professional reason for refusing to hand over records. “A new accountant, when writing an ethical letter, should seek to find out whether or not there are outstanding fees or any other matters that they need to be aware of,” says Stickney. “In response, the existing accountant could write something like, ‘look, I have outstanding fees and I am claiming a lien over these records until such time as the outstanding fees are paid’.
“But members need to be mindful that they only assert a valid lien and understand their legal rights and obligations before withholding records. If in doubt, seek advice.”
Have a policy to deal with complaints
Dixon advises that CAs in Australia must have a policy in place to deal with complaints stemming from the transfer of files, according to CR 3 – Public Practice Regulations. “There’s a requirement in Australia under 3.12 Client Complaints and Member Responsibility that you must have a policy to deal with complaints,” she says. “If you receive a complaint from a client, and this may be the reason they’re transferring their business elsewhere, follow your complaint policy.”
If the client doesn’t have a complaint and is leaving for other reasons, accountants still have obligations to respond professionally. “It’s still in your interest to respond professionally from a business perspective, but also from a membership perspective, because you may be subject to a complaint if you don’t,” says Dixon.
Having a policy to deal with complaints is not mandatory in New Zealand. However, Stickney maintains it’s a good idea to have one. “Not handling a complaint well can certainly give rise to ethical breaches, especially poor professional behaviour.”
Related: Ethical conduct in finance
It won’t come as a much of a shock that a study of the nation’s ethics and corporate culture found many Australians view big business as unethical, but accountants fared pretty well, being considered the most ethical professionals in the finance sector.