Conflicts of interest: A practical approach for small firms.

• Author: Valenti, Stephen P.

Tax practitioners are required by both the AICPA Code of Professional Conduct and Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), to screen for and address conflicts of interest related to professional services. It is prudent for even small firms to have a policy in place to identify and deal with potential conflicts because Circular 230 holds tax leaders within a firm responsible for establishing procedures that ensure firm members comply with the rules. While Circular 230 applies only to practice before the IRS, the AICPA standards apply for all professional services. Additional local or jurisdictional rules may apply.

When conflicts are readily apparent, they have to be dealt with, but there are also circumstances in which practitioners have an affirmative duty to seek to discover potential or actual conflicts. This means that even it the conflict is not self-evident, the practitioner should take steps to determine whether a conflict might exist presently or arise later. Such situations are most likely to present themselves when the firm is onboarding a new client; firms should take steps to ensure that there is not a conflict with an existing client or the staff or firm itself.

It can be difficult for practitioners to identify what circumstances rise to the level of a potential or immediate conflict of interest. Specific circumstances might not be addressed in the standards or the examples provided in additional guidance. Circular 230, Section 10.29(a), states that a conflict of interest exists if the representation of one client will be directly adverse to another client or there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, to a former client, or to a third person, or by a personal interest of the practitioner.

The guidance in the AICPA standards, found here, falls under the "Integrity and Objectivity Rule" (ET [section]1.100.001), which states that a practitioner shall be free of conflicts of interest and maintain objectivity and integrity. Since the standard does not fall under the "Independence Rule" (ET [section]1.200.001), which can never be waived, it is possible for some conflicts of interest to be waived and for the engagement to continue.

Categories of conflict

The AICPA divides conflicts into three general categories: adversarial conflicts, transactional conflicts, and relational conflicts.

Adversarial conflicts occur when two clients of the firm have directly opposing interests in a matter. The firm cannot provide adequate representation regarding the matter to both clients because the representation of one client will necessarily harm the other client.

This type of conflict generally cannot be waived by consent.

Transactional conflicts are present when the firm is representing two clients who are involved in the same transaction. If the nature of the transaction is not directly adversarial, the conflict may be waived with informed consent. The conflict may change during the course of the transaction, becoming adversarial in nature and therefore nonwaivable.

Relational conflicts arise when the clients have a relationship of some sort, either through marriage, co-ownership of a business, or another existing relationship. The practitioner's relationship with the opposing clients may give the appearance of impaired objectivity on the part of the practitioner, and the clients should be properly advised and consent should be obtained.

Practitioners must use professional judgment to determine whether there is a conflict of interest in a given situation, taking into account whether a reasonable and informed third party who is aware of the relevant information would conclude that a conflict of interest exists. Additionally, the AICPA standards take into account whether the perception of a conflict of interest may exist. Given these standards, when might a conflict arise?

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