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By John Gardner, Leonare Lawrence, and Susan Willey

CPA tax practitioners are involved in a myriad of client engagements ranging from tax planning and compliance services, to work before state and local taxing authorities, to representing clients in adversarial proceedings at the appellate level of the IRS. This competitive practice environment is constrained by client expectations, including a willingness to pay for professional services, that may produce potential conflicts between CPA and client interests. Particularly in tax matters, CPAs must constantly balance ethical responsibilities with their professional obligation to serve as client advocates.

Unfortunately, accounting and tax practice manuals provide little guidance to enable practitioners to identify and avoid conflicts of interest that may arise in tax practice. The AICPA tax practice manual neither identifies nor discusses conflicts in detail, but merely warns CPAs to avoid conflicts of interest.

Nevertheless, CPAs must be sensitive to the potential for conflicts of interest that may arise under Rule 102 of the AICPA Code of Professional Conduct (the code) and Revised Interpretation 102-2 (March 1995). This revised interpretation both broadens the meaning of conflict of interest and provides examples of situations that may constitute a conflict of interest or otherwise impair an accountant's objectivity in providing personal financial planning and/or tax services.

AICPA Professional Standards

The code indicates that the variety of attest, tax, and management advisory services performed by public accountants may produce conflicting pressures and objectives. In providing attest services, for example, CPAs are to be independent. In contrast, CPAs may serve as client advocates when providing tax services. When providing consulting services, however, CPAs must avoid acting or even appearing to act as a member of management.

In this diverse practice environment, a tax practitioner may ask, "What should I do about conflicting pressures and the conflicts of interest they may generate?" and "Where is the guidance to help me meet the requirements of the code?" The short answer to the first question is that tax practitioners should avoid all conflicts of interests in providing services to any future, current, or potential client whether a business entity or individual. Such advice presumes, of course, that practitioners can anticipate and recognize potential conflict-of-interest situations in a timely manner.

There is no short answer to the second question. To comply with the code, practitioners must look both inside and outside the AICPA for guidance. The Interpretations of Ethics Rules (Interpretations), Rulings on Ethics Rules (Rulings), and Statements on Responsibilities in Tax Practice (SRTPs), provide guidance within the AICPA. External guidance may be found in state administrative codes; state accountancy association rules, interpretations, and rulings; and case law. Unfortunately, these latter sources provide practitioners with minimal assistance in identifying and resolving conflicts of interest in tax practice.

AICPA Guidance

The code does not impose separate professional standards of conduct upon tax practitioners. It requires, however, "attitudes and habits of truthfulness and integrity in all of a CPA's practice, including tax practice." When performing any professional service, Rule 102 requires that a CPA "shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." Interpretation 102-2 (revised in March 1995) specifically describes conflict of interest:

A conflict of interest may occur if [an accountant] performs a professional service for a client or employer and the [accountant] or his or her firm has a relationship with another person, entity, product, or service that could, in the [CPA's] professional judgment, be viewed, by the client, employer, or other interested parties, as impairing the [CPA's] objectivity. If the [accountant] believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other interested parties, the rule shall not operate to prohibit the performance of the professional service. When making the disclosure, the [accountant] should consider Rule 301, Confidential Client Information.

Certain professional engagements, such as audits, reviews, and other attest services, require independence. Independence impairments under Rule 101, its interpretations, and rulings cannot be eliminated by such disclosure and consent.

As revised, Interpretation 102-2 broadens the meaning of conflict of interest. Previously, only significant relationships between an accountant and another person, entity, product, or service appeared to create a conflict of interest. Now, apparently any existing relationship may pose the threat of potential conflict of interest.

Interpretation 102-2 also clarifies which parties may view the relationship as one of conflicting interests. Prior to the revision, the wording merely indicated that the "relationship ... could be viewed as impairing" the accountant's objectivity. Now the language specifies that, "in the [CPA's] professional judgment," the relationship could be viewed by a "client, employer, or other interested parties" as impairing his or her objectivity. This key terminology, however, is neither analyzed nor explained in sufficient detail to provide much practical guidance to CPAs about conflicts of interest.

In addition to more explicitly defining conflicts-of-interest, Revised Interpretation 102-2 provides the following examples of typical potential conflict-of-interest situations when a CPA --

  • has been asked to perform litigation support services for the plaintiff in connection with a lawsuit filed against a client of the [CPA's] firm.

  • provided tax planning services for a married couple who is undergoing a divorce and has been asked to provide the services for the couple during the divorce proceedings.

  • plans to suggest that the client invest in a business in which [he or she] has a financial interest in connection with a personal financial planning engagement.

  • provides tax or personal financial planning services for several members of a family who may have opposing interests.

  • serves on a city's Board of Tax Appeals that considers matters involving several of the [CPA's] tax clients.

  • has been approached to provide services in connection with the purchase of real estate from a client of the [CPA's] firm.

  • refers a personal financial planning or tax client to an insurance broker or other service provider, who refers clients to the [accountant] under an exclusive arrangement to do so.

Recently, the AICPA issued Interpretation 102-6, which addresses professional services involving client advocacy in tax practice and other engagements. Interpretation 102-6 specifically warns that "there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility and thereby pose an unacceptable risk of impairing the reputation of the member or his or her firm with respect to independence, integrity, and objectivity." Tax or consulting services involving advocacy for a client or the client's position on accounting or reporting issues with standard-setters, regulators, or others, are considered professional services governed by the code, including Rule 102. Since aggressive client advocacy at the appeals level before the IRS may impair a practitioner's ability to adhere to the requisite standards of objectivity and integrity mandated in the code, conflicts of interest may result. While CPAs should continue to represent their clients aggressively, they should also recognize that competing obligations of objectivity and integrity may increase the potential for conflicts of interest.

Another recent ruling considers the following potential conflict-of-interest situation. A practitioner is approached by a company (for which the practitioner may or may not already be providing services) to provide tax and personal financial planning services for executives of that company. In providing services in the best interest of these executives, the practitioner may recommend actions that could be adverse to the company itself. In such a situation, the ruling advises the practitioner to consider the requirements of integrity and objectivity in Rule 102 in conjunction with Rule 301, Confidential Client Information. Rule 301 requires that "a [CPA] in public practice shall not disclose any confidential client information without the specific consent of the client."

The SRTPs issued by the AICPA Responsibilities in Tax Practice Committee and the Tax Executive Committee offer little guidance for dealing with conflicts of interest. Although the SRTPs are considered by the AICPA to be "educational and advisory," the IRS director of practice considers the SRTPs to be part of the customs and practices of the profession and may enforce them.

Other Guidance

Treasury Circular 230, which governs practice before the IRS by CPAs, attorneys, and enrolled agents, also establishes standards for avoiding conflicts of interest in tax practice. Paragraph 10.29 provides that "[n]o . . . certified public accountant . . . shall represent conflicting interests in his practice before the IRS, except by express consent of all directly interested parties after full disclosure has been made." Unfortunately, key terms such as "conflicting interest," "express consent," "directly interested parties," and "full disclosure" are neither defined nor illustrated in the circular itself or in materials provided by the IRS. However, since Section 10.29 parallels the ABA standard for attorneys articulated in former Ethical Canon 6, a review of current ABA standards may be useful to CPAs who provide tax engagement services to clients in an advocacy role more analogous to services provided by lawyers.

ABA Model Rules. Loyalty is essential to the attorney-client relationship. Thus, attorneys are prohibited from representing a client if doing so will adversely affect another client, unless each is informed of the conflict and consents to the representation. In determining whether representation may be adverse to a client's interests, Comment 5 articulates an objective standard for determining whether a conflict will adversely impact a client: Would "a disinterested lawyer ... conclude that the client should not agree to the representation under the circumstances"; if so, even consent is insufficient to overcome the conflict. Similarly, in representing multiple clients with differing interests before the Tax Court, Tax Court Rule 24(f) requires the practitioner to either withdraw or "take whatever other steps are necessary to obviate a conflict of interest," unless the attorney obtains the client's informed consent.

ABA Model Rules 1.10 indicate that if an attorney would be disqualified from representing clients due to a conflict of interest, the firm itself may not represent the client. As it is unclear whether Section 10.29 of Circular 230 imposes a similar "imputed disqualification" on all members of a CPA firm, accountants should seriously consider the implications of the ABA rule. CPA firms must also remember that clients do not simply hire a particular CPA--they hire the entire firm. The IRS director of practice may find it difficult to believe a wall of silence exists between the practitioner and the firm in such situations. If the director of practice concludes a CPA's conflict of interest violates any part of Circular 230, the IRS may have a letter of reprimand placed in the practitioner's permanent IRS file, or suspend or disbar the practitioner from future practice before the service.

State Law. CPA tax practitioners who frequently operate in a fiduciary relationship with particular business, personal financial planning, and tax clients are advised to consult state law governing fiduciary relationships. A CPA might become a fiduciary, for example, if the practitioner is involved with transactions that affect the client's property or recommends particular investments to a client, such as a tax shelter in a working gas and oil interest. The duties of a fiduciary are analogous to the responsibilities outlined in Interpretation 102-2, which also requires full disclosure, maintenance of client confidentiality, and adherence to other professional responsibilities.

Noncompliance with ethical standards may also constitute malpractice under state law, particularly where the breach injures the client. A review of the case law in this area indicates there have been no definitive rulings on the application of professional responsibility interpretations to CPAs in state courts. Caution is advised. Practitioners should consult with competent counsel since this area of liability law is constantly evolving.

Potential Problem Areas

Family Tax Planning. Accountants may confront conflicts of interest when representing clients during a marital dissolution. For example, where an accountant has provided tax planning services for a married couple for many years, the parties may ask the accountant to continue providing such services for the couple during amicable divorce proceedings. Even where both parties give "knowledgeable consent" to the practitioner's proposed role, there may be a conflict of interest under Rule 301 arising from the practitioner's capacity to maintain the confidentiality of information provided by each of the parties. In addition, if either spouse is unsophisticated about family financial matters in comparison to the other spouse, there is a question about whether that party has the capacity to even provide "knowledgeable consent."

Some firms secure formal permission to complete the couple's last joint or separate tax returns and provide advice regarding distribution of jointly owned property. In community property states, it is particularly essential that each party to the divorce be represented by competent counsel, even though only one CPA may complete the tax engagement for both divorcing parties. In addition, even amicable divorce proceedings can become contentious, and the CPA must ensure that no confidential information is communicated to parties in violation of client confidentiality. CPAs must clearly identify for whom they are working in such situations. They should not distribute any client information without permission unless required to do so by law. Practitioners are also advised to consult their own legal counsel to determine if the divorce context places them in a fiduciary capacity under Federal or state law or requires the CPA involuntarily disclose information.

Succession and Estate Planning. CPAs working with attorneys, investment advisors, and other professionals in multi-generational tax planning situations, may encounter disputes over division of property, ownership of businesses, and charges of either favoritism or conflicts of interest from disgruntled beneficiaries. Although it may be preferable for all parties to the planning engagement to be represented by independent professionals, this may not be practical due to cost factors and other realities of the professional environment.

CPAs should have a clear engagement letter that outlines their responsibilities in any planning situation. The engagement letter should explicitly detail whether the CPA firm is assuming the primary responsibility for the planning or is merely acting in an ancillary or secondary team role to other professionals. The CPA firm should fully disclose potential conflicts of interest and secure written approval from all parties if it undertakes to represent multiple parties in the transaction. All engagement letters or contracts should clearly specify for whom the practitioner is working and to whom information may be disclosed.

Insurance companies often discourage CPAs who represent more than one party in a succession or estate planning engagement from completing the tax return for any beneficiary. Since the CPA has access to personal financial information that could be used to the beneficiary's disadvantage, a conflict of interest may arise. If so, both the CPA firm and attorneys may be named in a liability claim for not fully disclosing the details of the succession plan or will. While the realities of practice may preclude such representation, the CPA should secure written permission from the client to engage in such work. The CPA should also keep written records of any discussion with the clients.

Litigation Support. Accountants may be asked to perform litigation support services for a current client in connection with a lawsuit filed against a former client of the accountant's firm. Under Rule 301 this situation produces a conflict of interest if any part of the subject matter of the suit relates in any way to the work the accountant performed for the former client. In addition, if the accountant's knowledge of the former client was gained through the former practitioner/client relationship and could be used to disadvantage the former client, a conflict of interest arises.

Representing Both the Entity and Its Owners. A tax practitioner may be asked to prepare both the tax information return for a partnership and the individual returns for each of the partners. Even if the partnership and each of the partners give "knowledgeable consent" for the practitioner to prepare these returns, it is questionable whether the practitioner can keep confidential the information provided by each of the separate parties.

Conflicts of interest can arise in other areas related to pass-through entities. For example, while depreciation and inventory methods elections are made at the entity level, such elections affect the individual or business tax returns of all owners. Thus, both a group of majority owners in an equipment business and the CPA firm completing the company's return might be accused of making elections that favored the majority at the expense of the minority. This is especially likely if the CPA firm completed individual returns for some of the majority owners. The CPA firm must remember it is employed by the entity and not by the owners of the entity. Decisions regarding elections should be governed by the ownership agreement and should be made by the owners, not the CPA firm. Practitioners should explain the election to the taxpayer and document both the disclosure and the taxpayer's decision.

Providing professional services to both majority and minority interests in a corporation or partnership may produce conflicts of interest, as may buy/sell agreements between majority and minority owners. To avoid such conflicts, practitioners must ascertain whether they are in compliance with the standards in Interpretation 102-2 and document their conclusions.

Coping with Conflicts of Interest

CPA tax practitioners must put systems in place that will alert them to the existence of potential conflicts of interest. These systems may range from simple recordkeeping to sophisticated software. Lists of new and potential transactions or clients that describe the proposed transaction and the identity of potential or current clients can be circulated to all equity owners and managers. Sufficient time should be allotted at the firm level to examine the potential of a conflict of interest prior to undertaking engagements. Multioffice firms may also use software that alerts them of clients whose interests might produce conflicts in particular engagements, e.g., buy-sell transactions and providing litigation support as expert witnesses.

Once a potential conflict of interest is identified, the firm should adopt a defensive policy designed both to assess the business risk and to adhere to at least the minimal standards contained in Interpretation 102-2. A firm must view the issue of conflicts of interest from the point of view of the disinterested observer or the potential lay juror. What will such a dispassionate individual think about the potential conflict of interest? The firm must also balance its need to retain and acquire new accounts with the risk of misjudging whether either a party to a transaction or a current client may view a particular transaction as a conflict of interest. While Interpretation 102-2 does not provide much guidance to practitioners making this determination, CPAs would be advised to maintain objectivity both in fact and in appearance--much as they do actual independence and the appearance of independence in an audit context.

Firms may want to classify certain types of transactions, e.g., marital dissolutions, as too risky to be undertaken unless the opposing parties are independently represented. Where a professional associated with a firm has a conflict of interest, firms may want to consider the entire firm as being disqualified unless the client consents and there is appropriate disclosure and consultation.

The AICPA Professional Standards do not define adequate disclosure to a client; nor do those standards identify what qualifies as consent. For example, where multiple parties with potentially conflicting interests request a particular CPA or firm to provide professional services, would it be sufficient to first notify all identified parties that a potential conflict of interest exists and then obtain written consent from all affected parties? To comply with AICPA SRTP 8, Form and Content of Advice to Clients, disclosure should be documented in writing, like many other client communications. Similarly, all consent letters should be signed by every appropriate party. The firm should then verify that all clients understand the communication and any required consent/release documents are signed and returned to the firm before the engagement actually begins.

CPAs should document their rationale for determining that a situation does not pose a conflict of interest. This document should be contemporaneously dated and retained in the files. CPAs are also advised to consult with their insurance carriers regarding potential conflicts of interest. The liability carrier employs experts who can provide assistance to practitioners in avoiding or minimizing damages from perceived or actual conflicts of interest. The firm's tax director, another partner, or an outside authority, moreover, should periodically review the firm's procedures and individual cases involving conflicts of interest as they arise.

When undertaking personal financial planning engagements, practitioners must follow the AICPA's Statements on Responsibilities in Personal Financial Planning Practice. These statements outline the basic responsibilities of the engagement as well as the CPA's responsibilities when working with other advisors. It may also be useful to consult Lawyers and Certified Public Accountants: A Study of Interprofessional Relations (1981) prepared by the National Conference of Lawyers and CPAs. The study contains guidance for both attorneys and CPAs who work in the tax and estate planning areas.

John Gardner, PhD, CPA, Leonare Lawrence, PhD, CPA, and Susan Willey, JD, are with the University of Wisconsin­La Crosse. The authors express their appreciation to CNA Insurance, Herbert H. Landy Insurance, Debra Winiarski, and Wayne Baliga for information that contributed to the preparation of this article.

In Brief

Balancing Ethical Responsibilities with Client Advocacy

To enable tax practitioners to more easily identify and successfully resolve potential conflict of interests, the authors review guidance provided by AICPA professional standards, Treasury Circular 230, analogous ABA Model Rules, and state fiduciary law. They also analyze services, such as family tax planning, succession or estate planning, litigation support, and those where the accountant represents both the entity and its owners, that often give rise to potential conflicts of interest. The article offers several suggestions for tax practice management to cope with such potential problems.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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