- Evaluate relationships and interests that may create a conflict of interest and employ safeguards
- If no safeguards are available, members must decline, disengage or terminate the relationship
- Complaints often involve members who have not recognised a changing relationship
By Rebecca Stickney
Proper handling of conflicts of interests is an issue that comes up frequently before the disciplinary bodies.
Although it is a relatively straightforward part of the Code of Ethics, it is an area in which members appear to trip up on surprisingly often.
Most members would probably say that they would certainly recognise if they were conflicted. However, many of the complaints received involve conflicts that are obvious to an outside party (such as
the disciplinary bodies, the complainant’s lawyer or the new accountant) but the members involved have lost perspective and cannot see the issue.
A conflict of interest is a relationship or interest which may create or have the appearance of creating a threat to objectivity.
The test that the disciplinary bodies look at is whether “a reasonable person looking at the circumstances of the particular case thinks that there was a real possibility of conflict” (NZ Disciplinary Tribunal 2014).
What standards apply
The ethical rules are essentially the same on both sides of the Tasman. New Zealand resident members must comply with the Code of Ethics (NZ) while members in Australia and overseas comply with APES 110 Code of Ethics for Professional Accountants. These are based on the Code issued by the International Standards Ethics Board for Accountants.
Both Codes are structured in terms of the fundamental principles relating to conflicts (paragraphs 100.17-100.18) and specific rules on conflicts for members in public practice (section 220) and members in business (section 310) (rule references are the same in both jurisdictions). There are also standards in each jurisdiction on conflicts and independence as they relate to specialist areas such as assurance, insolvency and valuations.
The rules in section 220 and section 310 are effectively the same and this discussion applies equally to members in public practice and members in business. References to clients can mostly be interchanged with other types of parties identified in paragraph 310.1 such as employers, vendors, customers, lenders, shareholders, boards and committees.
Members who are not working in public practice must also be aware of and responsive to conflicts.
The overarching principle is that members must not allow conflicts of interest to compromise professional or business judgement. The codes require members to identify and evaluate different relationships and interests that may create a conflict of interest, and implement safeguards to eliminate or reduce the threat to compliance with the fundamental principles to an acceptable level.
If no safeguards are available, members must decline or disengage from the engagement or professional activity, or terminate the relationship or dispose of the interest, to eliminate the threat or reduce it to an acceptable level.
These steps must be undertaken as soon as a potential conflict is identified, however it is also necessary to continue to review the conflict to ensure the safeguards remain appropriate.
Often the complaints we see involve members who have failed to recognise a changing relationship such as in a matrimonial or shareholder dispute and they wrongly assume, albeit with the best intentions, that they are acting in the best interests of the clients, when those clients’ interests may be significantly and rapidly diverging.
The types of safeguards that may be appropriate will depend on the circumstances and are not necessarily limited to the examples given in the Code of Ethics. These can include:
For members in public practice
- Implementing mechanisms to prevent unauthorised disclosure of confidential information when two clients have competing interests, via use of different engagement teams; setting up separate divisions in the practice to restrict the flow of confidential information between teams; and establishing policies and procedures to limit staff access to client files
- Regular review of the safeguards by a senior individual not involved in the engagement
- Using another member not affected by the conflict or involved in the engagement to review the work performed to assess key judgements and conclusions
- Consulting third parties such as CA ANZ, legal counsel or another member
- More generally, education of all staff regarding the principles and risks associated with conflicts so that they can be identified in time
For members in business
- Restructuring or segregating responsibilities or duties
- Obtaining appropriate oversight, such as supervision by an executive or non-executive director
- Withdrawing from the decision making process related to the matter giving rise to the conflict
- Consulting others
Having identified an actual or perceived conflict, the member must disclose the interest and any applicable safeguards to the affected party or client and obtain consent to act.
The codes talk about disclosure and consent taking different forms such as whether there needs to be specific or general disclosure (general could be included in standard terms of engagement), and in certain circumstances consent being implied by the client or affected party’s conduct where the member has sufficient evidence to conclude the person knew about the conflict at the outset and had no objections.
In relation to documentation, where disclosure is verbal or consent is verbal or implied, the codes use the words the member is “encouraged to document”. These are matters of professional judgement, however, we would urge members not to rely too heavily on these parts of the codes, including regarding general disclosure, and instead develop robust procedures that ensure conflicts are clearly explained and documented. In some cases the disciplinary bodies will allow some latitude in terms of implied consent or accepting the member’s word that disclosure/consent has occurred, however, the more serious the conflict the greater the expectation will be on members proving that they have complied — so document, document, document.
Types of conflicts
The complaints we see fall broadly within the following categories:
- Conflicts between the member’s personal interest and those of other parties
- Conflicts between the interests of two or more clients or parties
Complaints falling in the first camp tend to be more serious, particularly where the member has a financial interest.
Entrepreneurial members who enter into business ventures or investments with clients will be expected to have their i’s dotted and t’s crossed and be able to demonstrate compliance with the codes. Often there is an overlap with integrity or client monies breaches, which will aggravate the seriousness of the complaint. While members can enter into investments with clients, it is important to remember the absolute bar from investing client monies in oneself directly or indirectly (NZ PS-2 Client Monies, AU APES 310 Dealing with Client Monies).
Careful thought should be given to signatories on bank accounts, processes for approval of any payments to shareholders where the member will be advantaged, documentation of the terms on which funds are advanced and secured and approval of the member’s invoices for any professional services rendered.
Members should also be cognisant of wearing multiple hats and the responsibilities that may overlap, that is, accountant, trustee, director, shareholder. Ethical and fiduciary obligations may trump other rights, ie acting as a director of the investment company and, as a result, approving decisions that favour the member’s personal interest such as payment of accounting fees, even if this is permitted under the company’s constitution.
Getting these types of issues wrong has resulted in some members being suspended or struck off.
The tribunals regard management of conflicts of interest where the member has a personal interest as an “essential aspect of maintaining the public’s trust in the profession and can never be regarded as a minor matter” (NZ Disciplinary Tribunal 2013). Members also need to be careful of “the possibility that there may be perceptions of lack of independence or conflict of interest” (AU Professional Conduct Tribunal 2015), even if such perceptions have not resulted in the imposition of such serious sanctions.
Caught in the crossfire
As for the second scenario, these complaints come in many forms but typically involve public practitioners getting caught in the crossfire of matrimonial and shareholder disputes, or two clients entering into a transaction where the member is advising both.
The key is to identify the potential conflict early (even if parties are getting along) and ensure that everyone is aware of the issue and on the same page. If parties start getting into dispute, re-evaluate the conflict and safeguards and give consideration to whether to disengage.
In both cases we would recommend following the golden rules (see sidebar) to ensure compliance with the codes can be demonstrated. If the decision is made to step down, that should be clearly communicated. Do not leave until too late consideration of whether you need to cease to act for all parties.
Getting conflicts right is about developing good habits and procedures, taking time to reflect on relationships and interests, being alert to changing circumstances and protecting yourself from accusations of bias down the track through clear documentation.
Rebecca Stickney is lead, professional conduct and complaints (NZ), and Kate Dixon is senior consultant, professional conduct and complaints at Chartered Accountants ANZ.
This article was first published in the October 2015 issue of Acuity magazine.
The best method for managing conflicts of interest
The golden rules
Looking at the Code and disciplinary case precedents, the best method for managing conflicts of interest can be simplified into six golden rules:
- Identify perceived and actual conflicts of interest
- Disclose the conflict and the proposed safeguards
- Offer the opportunity to take independent advice
- Obtain consent to act
- Document: the disclosure of the conflict; the proposed safeguards; that you have offered the opportunity for independent advice; and, importantly, the clients’ informed consent to continue acting.
- Re-evaluate if there is any change in the nature of the engagement.