Preparing tax returns for a married couple getting a divorce, or for business owners or partners in dispute, are highly charged situations that can present potential conflicts of interest. What’s the best way to navigate such situations?
Friendly divorcing couples might start out in a cooperative spirit, but sometimes that will deteriorate as negotiations proceed and each act on the advice of counsel. Couples don't always remain friendly or amicable. It isn't their fault — it's someone else's. Who do they blame when things don't work out the way they should? Their CPAs.
One or both spouses may later assert that their CPA benefited one spouse more than the other. Divorce situations require the CPA to treat each spouse equally, regardless of who has more marital assets or who pays their fees. Although representing both spouses is not prohibited, it is rarely advisable. If both cooperate with the CPA, the engagement might work. If the CPA decides to represent both parties, the CPA should always inform, and have each party acknowledge in writing1, the CPA’s potential conflict of interest as a form of protection before proceeding.
The same is true with business disputes. Disputes between owners or partners often result in advice that is perceived by one or more of them as favoring one party more than the other. This in turn may result in allegations of conflict of interest.
Participating in business deals with clients is another source of conflicts of interest. Investing in business deals with clients is often problematic, especially when the CPA also provides professional services to the business. Everyone is usually happy as long as the investment performs well. The CPA is perceived by the clients as a competent advisor with the client’s best interests at heart.
When the investment goes badly, however, the client’s perception of the CPA changes. The CPA appears to no longer have the client’s best interests at heart, and juries tend to sympathize with the suffering client, especially with the benefit of hindsight and factoids offered as evidence laid out by a skilled attorney. The CPA is portrayed as a financial expert who sacrificed the client’s best interests to advance his or her own.
Also, disclosing a conflict of interest to clients, while helpful, doesn’t solve the problem, even if the client signs the disclosure. It can later be argued that the client’s consent was not “informed” by a third party (such as an attorney). Don’t get too comfortable with disclosure as a form of protection. In the end, the question is whether there is a perception that the CPA no longer has unfettered loyalty to his clients.
Consult with your risk adviser or attorney familiar with CPA professional liability and conflicts of interest before proceeding with any service where a potential conflict is perceived. They will help you evaluate alternatives in light of your professional obligations to each spouse and business partner.
Also, when faced with any ethical dilemma, consider the AICPA’s Conceptual Framework. It is often useful to recognize threats to CPAs’ objectivity or independence and possible safeguards to reduce the threats to an acceptable level.2
1 Getting the parties' consent is mandated by the AICPA Code of Conduct (ET Section 1.110.010 and ET Section 2.110.010), but Circular 230 § 10.29 mandates tax practitioners obtain written consents, retain that documentation for at least 36 months after the representation ends, and if requested, must provide a copy to the IRS.
2 ET Section 1.000.010