Before providing a professional service to a client or employer, every CPA must consider the potential for conflicts of interest. Identifying real or perceived conflicts—and taking the steps to manage them—is essential to maintaining the profession’s reputation and the public’s trust.
The CPABC Code of Professional Conduct (CPA Code) provides registrants1 with extensive guidance on this topic. In this article, we review the major points in the CPA Code, discuss potential pitfalls to avoid, and share a few cautionary tales.
What is the rule?
The preamble to the CPA Code emphasizes the fact that objectivity is a fundamental principle governing a registrant’s conduct. It states that registrants must “… not allow their professional or business judgment to be compromised by bias, conflict of interest or the undue influence of others.”
Rule 210 of the CPA Code (Conflicts of interest) states that registrants must not undertake or continue to provide professional services to any client or employer when there is a conflict of interest between the interests of:
- The registrant and the client or employer;
- Two or more clients or employers; or
- The client or employer and a third party, where the interest of the third party and the registrant are aligned.
Managing conflicts of interest
Identifying conflicts of interest is the first step in managing them appropriately, so registrants should have an effective process in place to help them recognize potential conflicts—one that includes guidance on:
- Client acceptance and continuance;
- Managing situations of potential conflict; and
- Staff assignments.
As a registrant, you must decide whether there’s a conflict of interest before undertaking or continuing to provide professional services. If there is a conflict of interest, you must first decide whether to end the engagement/relationship or pursue it and take steps to manage the conflict of interest.
You must decline to provide, or withdraw from providing, the services in question unless you take specific measures. These include:
- Informing each affected party of the conflict of interest;
- Obtaining each party’s consent to accept or continue with the services despite the conflict of interest;
- Comprehensively documenting the nature of the services and the techniques you intend to use to manage the conflict of interest;
- Establishing appropriate organizational structures, policies, and staffing. For example, an organization may use blanket or engagement-specific confidentiality agreements to be signed by all personnel, and ensure that specific staff and partner assignments do not conflict where clients having competing interests; and
- Setting up organizational firewalls. An organization can set up firewalls to restrict the flow of information and ensure that confidential information is not shared inappropriately.
Rule 210 provides extensive guidance on this topic. For example, in the guidance to Rule 210 (F32), the CPA Code states: “A fundamental underpinning to the management of conflicts of interest involves consent by the parties to whom professional services are provided. Unless the conflict of interest is one that reflects commonly accepted practice such that each affected party’s agreement can be inferred from that party’s conduct, consent should be obtained by:
- Notifying each affected party of the existence of such a conflict; and
- Either obtaining the agreement from each affected party to proceed in spite of the conflict or declining to provide or terminating the professional service giving rise to the conflict.”
Additionally, the CPA Code maintains: “The onus is on the registrant to be able to demonstrate that consent has been obtained” (F33).
When identifying conflicts of interest, registrants should also refer to Rule 206 (Compliance with professional standards), which requires compliance with generally accepted standards of practice, and Rule 207 (Unauthorized benefits), which prohibits registrants from obtaining unauthorized benefits.
Areas of greatest risk
The guidance to Rule 210 (B5) indicates that there are three main scenarios in which conflicts of interest tend to arise for registrants who work in public practice:
- Pursuing clients’ interests – Registrants are obliged to provide professional services with integrity, due care, and objectivity, as per Rule 202 (Integrity, due care, and objectivity). So what happens when the interests of two or more clients conflict? In such cases, the registrant(s) has to determine how best to fulfil their obligations to each client.
- Protecting confidential information – Registrants must keep each client’s information confidential, as per Rule 208 (Confidentiality of information). This may require extra vigilance when dealing with clients who have competing interests.
- Maintaining independence in assurance or insolvency situations – As required by Rule 204 (Independence), any registrant who provides assurance and/or insolvency services must do so objectively. If, in the process of providing these services to one client, the registrant learns something of material importance to another, the registrant can neither share the information nor feign ignorance. This may create an unresolvable conflict of interest, and in such cases, the registrant should decline one or both assignments.
Conflicts of interest can also arise outside of public practice, where no clients are involved. For example, if a registrant has a financial interest in their employer’s transaction and has an opportunity to influence information or decisions for financial gain, there is a conflict of interest. The CPA Code provides additional examples, including:
- A registrant serving in a management position for two employers and acquiring confidential information from one employer that could be used to the advantage or disadvantage of the other; and
- A registrant selecting a vendor for their employer when an immediate family member could benefit financially from this transaction.
What about perceived conflicts of interest?
If a registrant’s private interests appear (to a reasonable person in possession of all relevant facts) to conflict with their professional responsibilities or obligations, there can be a perceived conflict of interest where none actually exists.
While perceived conflicts of interest are not specifically prohibited by Rule 210, registrants should remember that:
- Rule 201.1 (Maintenance of the good reputation of the profession) requires that registrants always act in a manner that upholds the good reputation of the profession and protects the public interest; and
- Rule 204 (Independence) addresses perceived threats to a registrant’s independence in several situations.
Moreover, where there is a perceived conflict of interest there is often an actual conflict of interest.
The consequences of misconduct
CPABC does not receive many complaints about conflicts of interest, which is a positive sign that registrants take their responsibilities seriously. However, failing to appropriately manage a conflict of interest can have life-changing consequences for a registrant, and it undermines the public’s confidence in the profession. So although the cases are rare, they bear consideration. In particular, the following three cases considered by CPABC’s Investigation Committee warrant mention:
- A member who was the director of finance for an organization also acted as the accountant for a partnership in which the organization had an interest (“the partner”). Without the knowledge or authorization of the organization’s board of directors, the member obtained a personal loan from the partner and had an option to acquire a financial interest in the partner. The organization complained to CPABC that the member was in a conflict of interest due to their dealings with the partner, and the Investigation Committee subsequently made a determination that included a reprimand, a fine, and payment of the investigation’s expenses. The member agreed to the determination.
- A member who was the CFO of a firm began an undisclosed personal relationship with a person they supervised, including approving payments to them. This relationship placed the CFO in a clear conflict of interest, and the employer complained to CPABC. The member’s employment was terminated by their employer, and the member accepted a reprimand from the Investigation Committee.
- A member provided free accounting and business management services to a family member and a close family friend who were partners in a business. The member made certain decisions about the nature and timing of payments to the partners and third parties that sparked disagreements and a complaint. In this case, the Investigation Committee determined that the member did not approach the engagement with sufficient formality to prevent, mitigate, or resolve these disagreements. In this instance, the Investigation Committee did not find that the member had breached Rule 210 (Conflicts of interest) but did determine that the member had breached both Rule 201.1 (Maintenance of the good reputation of the profession) and Rule 202.1 (Integrity and due care). The member accepted a reprimand from the Investigation Committee.
Penalties assessed through CPABC’s investigation and disciplinary process vary depending on the unique circumstances of each case; however, as the situations described in this article demonstrate, penalties may include fines and the costs of the investigation (which often exceed the fines). In serious cases, the Investigation Committee may refer the matter to CPABC’s Disciplinary Committee, which may find that suspension or cancellation of membership is appropriate under the circumstances.
Do you need guidance?
The guidance in the CPA Code is designed to help you understand how the rules should be applied. CPABC’s professional standards advisors are also here to help. You can consult them for confidential guidance to ensure that you stay compliant with the CPA Code when navigating difficult situations. Contact our advisors:
- Email: firstname.lastname@example.org.
- Telephone: 1-800-663-2677 (toll-free).
- As used in the CPABC Code of Professional Conduct, “registrants” refers to members, students (candidates in the CPA Professional Education Program), and registered firms. The CPA Code does not apply to students enrolled in the CPA preparatory courses.
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