How accountants manage conflicts of interest
Examples of conflicts of interest for accountants that may affect trust, plus how to avoid a complaint being made against you.
Quick take
- A conflict of interest is a relationship or interest that may create, or have the appearance of creating, a threat to objectivity.
- Establishing and documenting good conflict management processes in public practice is key.
- Engagement letters should be specifically tailored to each client, including acknowledging potential conflicts of interest.
One of the most challenging ethical situations members may encounter is a conflict of interest. It’s also one of the most common causes of complaint to the disciplinary bodies of CA ANZ and NZICA, as some members fail to prepare for, identify, and respond appropriately to this important concept.
Rebecca Stickney and Kate Dixon, leaders of the professional conduct teams in New Zealand and Australia respectively, discuss the situations where problems may arise, how members can avoid a complaint being made against them, and what to do if they identify a conflict of interest.
Types of conflicts
Stickney says a conflict of interest is a relationship or interest that may create, or have the appearance of creating, a threat to objectivity – and they generally fall into two categories.
“Conflicts of interest can arise when a member undertakes a professional activity for two or more parties whose interests are in conflict, or where the member’s own interests are in conflict with a party for whom the member undertakes a professional activity,” she says. “This often arises in client situations but can occur in a variety of scenarios including where members are employees.”
Stickney also advises members to consider perceptions of bias.
“If the circumstances surrounding an engagement might provoke suspicion from an informed third party that a member’s objectivity has been compromised, this must be dealt with appropriately, either with sufficient safeguards or by declining the work. Members must at all times appear to be acting objectively.”
Avoiding issues in advance
Dixon says members should remain familiar with their code of ethics, regardless of where they are in their careers.
She says some members believe conflicts of interest are uncommon in public practice, “but in fact it is inevitable they will come across it at some point.”
“Establishing and documenting good conflict management processes in your firm is an important first step and will also help you to identify potential threats to the fundamental principle,” says Dixon.
Secondly, documenting in your engagement letter what services you will or will not be providing is key, as well as identifying all your clients.
“Engagement letters must be specifically tailored to suit the circumstances. Identify, discuss and document any potential conflicts of interest that may arise,” says Dixon. “One common problem is where members have not adequately thought about the different clients they are acting for and where different interests may arise. It’s really important to set this out in the engagement letter as well. This way, there are no surprises. Communication and documentation are key.”
She urges members to be extra vigilant when dealing with clients with whom they are familiar, such as family or friends. “Failure to identify a conflict of interest is often due to a loss of perspective, or ‘blind spot’, due to being too familiar with a client,” she adds.
Dixon says members should also disclose in the engagement letter the types of safeguards that may be appropriate.
“These might include engaging different partners, ensuring instructions are mutually given by affected clients, or setting up information barriers, such as restricting access to files.”
Members should likewise recommend clients take independent advice and obtain consent to act with a revised engagement letter.
However, Dixon urges caution. “If a potential conflict of interest can’t be fully addressed, members should decline or end the engagement before it has begun.”
What if work has commenced?
Stickney says once a conflict of interest has been identified, members should evaluate whether the threat is at an ‘acceptable level’.
“Ask an informed third party to weigh and consider the circumstances, although do not forget confidentiality obligations. Consider the matter from that angle yourself. If deemed at an acceptable level, members should disclose the conflict to all interested parties, along with the safeguards they will adopt.”
Should the conflict be unacceptable, members must end the professional activity. Failure to comply with one of the fundamental principles of the code of ethics – integrity, objectivity, confidentiality, professional competence and due care, and professional behaviour – can be an offence under the CA ANZ by-laws and NZICA rules.
Conflict of interest examples
• Personal relationships with clients, vendors, lenders, or shareholders
• A falling out between partners or shareholders
• Clients experiencing matrimonial disputes
• Clients and companies that propose to transact with each other, such as when negotiating major contracts, or the sale and purchase of assets
• Undertaking multiple roles, including shareholder, trustee, executor, director relationships with clients, vendors, or lenders, while also undertaking a professional engagement
• Undertaking business ventures or investing in client or employers’ businesses.
Need help?
The CA Advisory Group service is free and all discussions are strictly confidential. Call 1300 137 322 (Australia) or 0800 469 422 (New Zealand).
