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March tip of the month: Conflict of Interest

CPAs often run into situations where they have been preparing tax returns for a married couple for several years, and the couple decides to get a divorce. Divorcing spouses who ask their CPA to provide advice and services to both spouses often present a potential conflict of interest. Friendly divorcing couples don’t always stay friendly, and who do they blame when things don’t work out the way they had hoped? The CPA.

One or both of the spouses may later assert that their CPA’s advice favored one spouse to the detriment of the other. Divorce situations require the CPA to treat each spouse equally, regardless of who has more marital assets or who is paying the fees. Although representing both spouses is not prohibited, it often isn’t a good idea. If both cooperate with the CPA, the engagement might work. If the CPA believes he or she can fairly represent both parties (a Circular 230 requirement), the CPA should obtain signed consent forms from them acknowledging and waiving any perceived or potential conflicts of interest.

However, the CPA should avoid complacency regarding disclosure—informing each party of your conflict of interest—as a form of protection. It could be later argued the client’s consent was not “informed” by a third party such as an attorney. Prepare a properly drafted engagement letter and obtain the couple’s signatures. It may be appropriate to disengage from one or both parties, even though that might create additional challenges.

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 partner to the detriment of another. This in turn may result in malpractice claims.

Business situations may be more complex than a divorce because more people are involved. The CPA firm may represent partners individually while also representing the entity. In addition, the CPA may be concerned that the firm’s objectivity has been compromised as the result of a developing or actual conflict of interest.

In the case of a potential or developing conflict of interest, it’s important to determine the extent of the conflict through use of the “reasonable person” test; i.e., “What would a reasonable person think in this situation?”

It’s always prudent to consult with an attorney or risk adviser familiar with CPA professional liability and conflicts of interest before going forward with any services.

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