Golden rules for addressing conflicts of interest
When CA ANZ deals with complaints against members, managing conflicts of interest comes up again and again.
- CA ANZ has released a new “Conflicts of Interest Guide” to explain how best to manage conflicts of interest.
- Familiarising yourself with the Guide and your obligations under the Code is essential for protecting yourself and your clients.
- It is inevitable that conflicts of interest will arise from time to time.
When dealing with complaints made against members, Kate Dixon and Rebecca Stickney – leaders of the CA ANZ professional conduct teams in Australia and New Zealand – say one area that continues to raise concern among chartered accountants is managing conflicts of interest.
It’s why CA ANZ created the six golden rules for managing conflicts of interest, which provides a valuable reference for members. Dixon and Stickney urge members to familiarise themselves with the rules, as well as CA ANZ’s new Conflicts of Interest Guide, not only to protect their clients, but to protect themselves as well.
1. Identify potential, perceived and actual conflicts of interest
It’s inevitable conflicts will arise when working with clients, especially if you’re wearing multiple hats, say, as an adviser to a family and also a trustee. Dixon recalls a case in which a member was acting for a married couple and also managing some of their entities, which included a trust and a self-managed superannuation fund (SMSF).
“When the husband and wife split, the member stopped acting for the wife because of a conflict, but he didn’t identify there could be a conflict in connection with the SMSF or the trust,” explains Dixon. “When the wife asked for information about the SMSF as she was a director of the corporate trustee, the member refused on the basis that he didn’t act for her any more.
“This member had decided that he was going to take instructions about the SMSF and trust from the husband. This was never discussed with the wife. She was just cut out. “When you’re involved in a number of different capacities, acting for different people, you have to be super careful.”
“When you’re involved in a number of different capacities, acting for different people, you have to be super careful.”
2. Evaluate if the conflict is at an acceptable level using the third-party test contained in the Code
If a conflict is identified, CAs must evaluate whether it can be eliminated or safeguards can be applied to reduce the risk of non-compliance with fundamental ethical principles. You should use the “reasonable and informed” third-party test in the Code of Ethics to help with your assessment.
The third-party test means a “reasonable and informed” third party weighs all the relevant facts the accountant could be expected to know, to see if they arrive at the same conclusion as the accountant about a conflict of interest.
If the conflict is not at an acceptable level, the next step is to consider whether it can be eliminated, addressed via safeguards or if the professional engagement should end.
3. Address the conflict by eliminating it, applying safeguards or ending the professional activity
There is always the opportunity to eliminate a conflict of interest and that can be part of the strategy to address it. Safeguards also help mitigate problems occurring down the track.
“A safeguard is something that enables you to address the conflict effectively,” explains Dixon. “With a safeguard in place, you may be able to keep acting.”
Using different partners, ensuring instructions are mutually given by affected clients or setting up information barriers such as restricting access to files are all safeguards you can apply. However, if the conflict of interest can’t be addressed, you should decline or end the engagement.
4. Disclose the conflict, the applicable safeguards, provide an opportunity to take independent advice, and obtain consent to act
It is important to disclose the conflict and the proposed safeguards to clients, and to obtain the clients’ consent to act.
“Considering how the conflict will be addressed and what should happen if problems arise protects the member as much as the client,” says Stickney.
“Written disclosure and consent to the plan also enables the member to demonstrate what was agreed if things go awry down the track.”
Another useful safeguard when advising several parties is to suggest clients seek independent advice. This is particularly important where the member’s own interests could be in conflict with the client’s, or the CA is acting for more than one party whose interests are in conflict.
“You could say, ‘It may be in your best interest to take independent advice,’” says Dixon. “You could even advise, ‘This is the scenario when we will stop acting.’ I think it helps manage clients’ expectations.”
If you’re acting for multiple parties, you should ensure your clients know what you’re doing.
“Often a member will say, ‘Everybody knew I was acting for everybody.’ But you need to explain the ramifications and identify all of the effective interests and safeguards,” says Dixon.
She recalls a case in which a member was acting for a number of partners in a business, both individually and collectively, and was also advising in relation to the dissolution of the partnership.
What the business partners didn’t know was the member was getting confidential information from one of the clients and not disclosing it to others.
“They didn’t appreciate that the member couldn’t independently advise them all in relation to the dissolution of the partnership,” Dixon points out.
5. Re-evaluate the professional activity and associated relationships periodically
Always be ready to review a client’s situation and re-evaluate your approach and disclosure if and when you need to.
6. Document how you have addressed these six steps
Document everything. You should keep a record of the disclosure of a conflict; proposed safeguards; offering an opportunity for independent advice; and the clients’ informed consent to continue acting.
A written document, email or file note are all sufficient, although best practice is to have written acknowledgement from the clients.
Stickney suggests practices should have policies and develop a conflicts of interest disclosure and consent template.
“The policy should prompt staff to think about the different types of relationships or interests that could give rise to conflicts, how the practice handles and records conflicts, and in what scenarios they will and will not act. Equally, disclosure and consent templates could be incorporated in engagement letters or in a standalone document.”
Having good protocols and documentation puts a member in a much better position if a dispute arises.
“At the end of the day, conflicts happen. The key is to really understand what your obligations are under the Code,” she says. “CA ANZ’s Conflicts of Interest Guide 2021 is a useful resource for explanation of the requirements. And don’t be afraid to ask us if you’re uncertain about something.”
Conflicts of Interest Guide 2021
Read the Conflicts of Interest Guide 2021Read more