Many potential conflict-of-interest situations are so convoluted that the best first step before taking action is to consult with legal counsel or a risk advisor for assistance. In the case of a potential or developing conflict of interest, risk advisors often evaluate the extent of the conflict through use of the "reasonable person" test ("What would a reasonable person think in this situation?"). For example, one needs to fully consider the nature of the relationships as well as the relevant interests of all affected parties, as well as the implications of these relationships/interests to the responsibilities, duties, and personal interests of the CPA. CAMICO policyholders have incurred significant losses and expenses in situations where the CPA satisfied the "rules-based" professional standards related to addressing conflicts of interest but didn’t meet the "claims standards" "reasonable person" test.
It may be necessary for the firm to disclose the potential conflict of interest to all relevant parties. Not disclosing a potential conflict of interest (perceived or real) does not play out well in a claim situation. However, disclosing a conflict of interest to clients and obtaining an appropriate written waiver from each affected party, while helpful, is not enough. If consent is forthcoming, it is critical that the CPA continues to identify, manage and monitor any impacts of the potential conflict, whether perceived or real, to minimize risk exposures.
The firm may need to disengage if one or more parties refuse to sign an agreement acknowledging the conflict and consenting to the firm’s continued representation, or if an actual conflict does arise. CAMICO advises and works with policyholders to tailor language for specific situations. No one solution fits all scenarios.
Consider the following scenario involving a general partnership client:The general partnership client has two partners. They engage the CPA to provide tax services for the partnership. One partner has a 70 percent share of the partnership, and the other the remaining 30 percent share. The majority partner also engages the CPA separately to provide individual tax preparation services. The CPA has worked for the partnership and its majority partner for the past three years.
One day the majority partner requests the CPA’s confidential advice and guidance regarding how to finance some large debts he has accumulated. Without hesitation, the CPA provides him some preliminary advice. However, the partner later leaves the CPA a voice message suggesting that the CPA come up with some partnership "creative financing" for the debt the partner has incurred. The partner also reminds the CPA not to share any of his "debt problems" with the minority partner.
The CPA is troubled by this request and the awkward position he is now in regarding maintaining confidentiality of information, which may jeopardize the CPA’s responsibility and obligation to the minority partner.
What should the CPA do?Some of the issues include:
- Disengagement at this point does not eliminate the potential liability exposure from the minority partner alleging that the CPA conspired against him. What if the majority partner has been taking money from the partnership to help cover his debt? The minority partner could allege that, had he known about his partner's debt problems, he would have acted to address the potential risks of embezzlement. He would have grounds for suing the CPA for a conflict of interest and for not disclosing knowledge.
- If the CPA discloses this information to the minority partner without letting the majority partner know of the disclosure, the CPA would be further complicating the situation and getting further entangled in this potential conflict-of-interest dilemma.
This is a highly charged situation, and it is important that the CPA not provide preferential treatment or benefit one partner to the detriment of the other partner. The percentages owned may be irrelevant when it comes to the CPA’s professional and ethical responsibilities. If the CPA refrains from disclosing information to one partner because of the confidentiality considerations of another partner, the CPA is already caught in the middle. The next steps might involve appropriate disclosure to both partners and, if ultimately deemed appropriate, disengagement to extricate the CPA from the conflict of interest.
Again, consulting with legal counsel or a risk advisor for assistance is the best first step before taking actions that could exacerbate a situation.