Avoiding conflicts of interest in divorce engagements.

Many CPA firms are asked to provide services for clients who are divorcing. When this situation arises, the firm needs to determine whether any perceived or potential conflicts of interest exist. Some nonauthoritative guidance for avoiding such conflicts is offered in a recent AICPA publication, A CPA's Guide to Family Law Services--Business Valuation and Fraud & Litigation Services Practice Aid 05-1.

Divorce engagements can pose potential conflicts of interest, or, at a minimum, the perception or actual lack of objectivity. Before accepting an engagement, the CPA should determine whether there are any perceived or potential conflicts. This is particularly important if the CPA is retained to represent an existing client. The following are situations in which this circumstance may come about:

* The CPA has previously performed services for both the husband and wife, such as tax preparation, financial planning, and estate planning, and, as such, has confidential information, the disclosure of which can be detrimental to an opposing party.

* The CPA performs services for a business owned by one or both of the parties. Potential or perceived conflicts that may exist in representing an existing client are also discussed in AICPA Consulting Services Special Report 03-1, Litigation Services and Applicable Professional Standards (product no. 055297).

* If the CPA is performing or has previously performed other services for one of the parties to the litigation and possesses confidential information, this information could be subject to discovery.

Independence issues may also arise if an expert witness repeatedly testifies for one attorney. Opposing counsel may attempt to imply a lack of objectivity based upon the continuing financial relationship between the CPA and the attorney.

A number of conflicts of interest can be overcome as long as the CPA informs the client and opposing party of the potential conflict and the parties express no objections.

The engagement letter: documenting the CPA's role

Although not required, CPAs should strongly consider using an engagement letter when accepting family law engagements. An engagement letter will not only help to establish a clear understanding of the roles and responsibilities of the CPA but also manage the expectations of all parties. Such letters should include, among other things, the scope of the engagement; the nature and limitations of the services to be performed; the parties to the contract; the...