Conflict of interest is a common allegation in malpractice claims. Some conflicts are obvious at the onset. However, it not uncommon for CPAs to find themselves in the midst of a conflict-of-interest situation without recognizing it.

Consider the following scenarios:

Scenario One: A CPA learned on April 1 that her long-term tax clients were divorcing. The husband was a majority partner in a law firm and the wife was a full-time homemaker. The husband asked the CPA to prepare and electronically file their tax return on a "married filing jointly" basis, similar to previous years. The CPA filed the return after receiving the signed Form 8879 and the husband's approval. Two years later, the CPA received a call from the wife's attorney, alleging that the CPA had a conflict of interest, having consulted with the husband's attorney on divorce settlement issues while preparing the return. The attorney further alleged that the CPA had taken tax positions on the return benefiting the husband, to the wife's detriment.

Scenario Two: A CPA performed tax services for a father and son, as well as tax and accounting services for the father's business. The father decided to retire and sell his business to the son. The CPA discussed the business' sale options with the father, who decided to enter into an installment sale. Following the sale, the CPA continued to provide services to the son and the business. Two years later, the business was not faring well due to an economic slowdown. The son was not able to make the installment payments to his father. The father's attorney sent a letter to the CPA alleging that his client had received bad advice due to a conflict of interest, and that he was seeking recovery for damages. He alleged this was the result of the CPA's failure to advise against the installment sale due to a desire to retain the business as a client.

Hindsight is always 20/20. CPAs should remain vigilant in monitoring for potential or actual conflicts of interest when performing services for clients who may be in potentially adverse positions. Divorcing clients, clients entering into business transactions with each other, and partnership or ownership disputes are examples of situations that typically present conflicts.

Guidance on conflicts of interest is provided in the rules and regulations of state boards of accountancy, regulatory agencies and professional organizations (e.g., PCAOB Auditing Standard No. 2, Paragraph 32, and SEC Independence Rule, 17 C.F.R. 210.2-.01). Rule 102 of the AICPA Code of Professional Conduct defines conflicts of interest and provides examples of various conflict-of-interest situations. Section 10.29 of Treasury Circular No. 230 also defines conflict of interest and describes the requirements for CPAs in conflict-of-interest situations.



Obtaining a waiver of a potential conflict of interest, signed by each of the affected parties, can provide protection against allegations - either in a lawsuit or disciplinary proceedings - that the CPA had an undisclosed conflict of interest. However, while a waiver will aid in the defense of malpractice claims, it typically will not cure a situation in which the CPA favored the interests of one client over another in rendering services.

CPAs should always consult with an attorney familiar with state law in the jurisdictions of both the client and the CPA firm to draft a waiver; some courts may rule it invalid if the language is too broad or it does not comply with state statutes. Generally, a waiver of a potential conflict of interest should:

Disclose the existence of a potential conflict of interest, based on potentially adverse interests between the parties, and provide a general indication of how the parties may be impacted - for example, that the advice provided to one party may adversely impact the other party;

Discuss the requirements and issues related to maintaining client confidentiality (e.g., disclosures to divorcing clients who are filing a joint individual tax return) and the need to resign from the engagement if the CPA concludes that there is a conflict; and,

State that by signing the waiver, the affected parties acknowledge that the potential conflict of interest has been disclosed to them, that they have consulted with their attorneys, and that they wish to proceed with the engagement, despite the existence of the potential conflict.

CPAs should consistently check for the existence of potential or actual conflicts of interest before accepting a new client or engagement, as well as monitor continuing client relationships or engagements. It will be very difficult to justify continued representation of both parties when an actual conflict exists - CPAs should consider resigning from an engagement in that circumstance. Potential conflict-of-interest situations should be identified as soon as possible and the CPA should seek to obtain a waiver from the clients.

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