Positive ID.

• Author: UELTZEN, MICHAEL C.
• Position: Conflicts of interest

Identifying and Resolving Conflicts of Interest

Pop quiz.

1) What is a conflict of interest?

2) How do you avoid one?

3) Are you sure?

How did you do? Did you pass with flying colors, or did you find yourself scrambling for reference materials?

THE CHANGING TIDE

Conflicts of interest always have spelled trouble for CPAs, but historically, the profession's focus on auditing and independence has helped to keep accountants' hands clean. In the past, if CPAs maintained their independence, the presumption was that no conflicts would arise.

While independence is still important--as is evident from last year's headlines about the SEC and its rules on auditor independence--today, integrity and objectivity are recognized as the primary guidance for all CPA-provided services. The AICPA Code of Professional Conduct is clear: "In the performance of any professional service a member shall maintain objectivity and integrity, shall be free of conflicts of interest and shall not knowingly misrepresent facts or subordinate his judgment to others." (AICPA ET Sec. 102)

Often, common relationships, such as those described in the sidebar on Page 11, spring unanticipated disillusionment and disenchantment from individuals who perceive harm, or who actually have been harmed by others. Under such circumstances, a claim is often made that the CPA somehow was conflicted by the engagements. A skillful plaintiff's attorney will seek to characterize innocent relationships as self-minded and profit-guided. This trend requires you to be constantly aware of and sensitive to your role in such relationships.

WHO IS THE CLIENT?

To evaluate potential conflicts of interest, you need to clearly identify who your client is and to whom your duties are arguably owed. According to the AICPA Code of Professional Conduct, "A client is any person or entity other than the member's employer that engages a member or a member's firm to perform professional services or a person or entity with respect to which professional services are performed." (AICPA ET Sec. 92)

For example, a CPA prepares a tax return for a professional service corporation and the related individual tax returns. One of the shareholders is considering leaving the professional corporation and consults with the CPA prior to advising his existing shareholders. In this case, the clients are the professional service corporation and each of the individuals for whom the tax returns are prepared. The clients, however, may have adverse interests and the CPA should not provide services to the shareholder who is considering leaving the corporation without obtaining a waiver of the conflict of interest. The practical solution is to recommend that the departing shareholder seek separate advice from another CPA or attorney.

Both the client and public-at-large expect that CPAs will be guided by a clear distinction between a client to whom duties are owed and others to whom no such duties exist.

WHAT ARE CONFLICTS OF INTEREST?

The standard for defining conflicts of interest is objectivity. The practitioner's conduct and whether a conflict of interest may exist are governed by whether a...