It is increasingly important for accountants to be on the front foot when it comes to ethical challenges. That includes knowing the proper processes when faced with these hurdles, real or perceived.
We spoke with four accounting specialists about a range of ethical dilemmas we posed in four scenarios.
Dilemma 1: Conflict of interest
You are the tax agent of Kim and Lindsay, who are divorcing but also run a business together. You’re still representing them both. What is the best way to ensure this situation doesn’t fall foul of conflict-of-interest issues?
ROBIN: This can prove difficult over time. The first step would be to issue new letters of engagement to directors/partners individually, for their own tax affairs and the business’s accounting and tax affairs. One should possibly put in writing the additional boundaries you will keep, to avoid any conflicts of interest, as well as stating that each party cannot ask about the financial affairs of the other. It may also be sensible to ensure that at any meeting both are present when discussing the business. If it looks like it is going to be acrimonious, then it may be better to walk away than be piggy in the middle. It is possible that what caused their marriage to break up may ultimately end up affecting the business in the same way.
BILL: Recognise and identify where conflicts might arise, then communicate with both clients about the potential for conflict. Strive to remain neutral and fair in all dealings, establishing strict protocols for managing confidential information. Consider separate representation in situations where conflicts become unavoidable.
SULMAN: In such a situation, representing both parties can indeed create a conflict of interest. The tax agent should be transparent with both Kim and Lindsay about the situation and inform them that he is representing both of them and that there may be conflicts of interest. The tax agent should obtain their informed consent to proceed. It is always recommended that each party hire a separate tax professional to ensure that each party’s interests are fully protected. The tax agent should also establish reasonable procedures within their firm to identify and manage conflicts of interest.
TIM: This is a common query and is covered by the Code of Ethics section 310, which details examples of conflicts of interest that firms should avoid. In this example, my advice would be to only act for one of the partners/directors, and have clear agreement in the letter of engagement on who the firm deals with in relation to the business. It may be that an agreement is in place to engage directly with both parties in relation to the business. However, I would recommend getting a formal agreement to deal with one, as it could create difficulties when carrying out the agreed services for the business.
Dilemma 2: Client confidentiality
You have been outsourcing some basic tax tasks to an offshore accounting services business. Their staff have been working from home, and you have reason to believe their IT security processes are not up to scratch, having been told about a data breach. What are your next steps?
ROBIN: Report to the Information Commissioner’s Office (ICO) and inform clients, as this could result in them being targeted by hackers. Check what steps the outsourcer has taken to stop the breach happening again. If unsatisfied, either change outsourcer or, better still, bring in house and under your own control.
BILL: Assess the breach by contacting the offshore provider and identifying affected data. Mitigate further risk by suspending data transfers and secure your own systems. Notify stakeholders, inform clients and, depending on severity, inform regulatory authorities. Review security protocols and conduct an audit. Consider in-house alternatives. Enhance security policies and carry out ongoing reviews and monitoring.
SULMAN: It is crucial to take immediate action to protect sensitive information as per the requirements of data protection rules/regulations. Identify which specific data or systems were compromised, evaluate the potential impact on your business and the consequences of further breaches. In such cases, you may have to inform your client about the breach. If you decide to continue working with the offshore firm, impose immediate improvements to their IT security processes and ensure they address vulnerabilities and implement stronger security measures. Otherwise, terminate the relationship and look for alternative service providers who can fulfil the IT security compliance requirements.
TIM: In this case the firm would need to assess both the severity of the potential or actual impact on individuals as a result of a breach, and the likelihood of this occurring. If the impact of the breach is more severe, the risk is higher. If the likelihood of the consequences is greater, then again the risk is higher. It really depends upon what information has been categorised as being in breach. If it is deemed to be a serious breach, then the firm would need to make a report to the ICO as, even though the breach took place overseas, it is the firm’s responsibility to protect client details under GDPR. The firm should seek clarification on what has happened and determine if processes have been put in place to prevent it re-occurring. Consider if the outsourcing should continue. The firm should also review its privacy statement and sub-contractor agreement to ensure robust data security measures are in place.
Dilemma 3: Suspicious activity
A small business you’re representing is earning income above and beyond what you might expect from one involved in their particular industry. You suspect suspicious activity. What are your next steps?
SULMAN: First of all, remember that your duty as a representative of the business involves protecting its interests whilst ensuring compliance with legal and ethical standards. You can collect detailed financial records and look for anomalies and irregular patterns. Consider external factors e.g. market trends, economic conditions, that might explain the increased income. Verify the legitimacy of the client’s compliance with regulations – aligning with tax filings and financial disclosures. Identify and evaluate the red flags, if any, and discuss your suspicions and findings with professionals who specialise in financial investigations. If you find evidence of fraudulent activity, consider reporting it to relevant authorities (e.g., tax authorities, law enforcement). You should always maintain confidentiality during such investigations.
ROBIN: See the evidence for the increase. Talk to the client and check their marketing activity. Do the margins on the variable costs look right? In the event you cannot understand the reasons behind the increase, then a report should be filed.
BILL: Conduct a thorough review of financial records to understand all sources of income. Discuss your findings with the client. Verify documentation and carry out a compliance check with consideration of money laundering regulations. Report any suspicious activity. Maintain confidentiality and disengage if necessary. Finally, document everything.
TIM: The firm should take steps to understand the source of funds relating to all clients and risk assess accordingly. If information received leads a firm to suspect earnings have been declared over and above expected levels, the firm should submit a suspicious activity report (SAR) to the National Crime Agency (NCA). Depending on the nature of the business providing products or services, it may be appropriate to ask why there has been an increase in income as there may be a simple explanation, such as expansion or a new sales rep, etc. The important thing to do is to review risk assessments and client due diligence to make sure you have the relevant information, then take appropriate action, not forgetting to document everything.
Dilemma 4: Questionable approach to tax
Most of a new client’s claimed tax deductions have dramatically increased since their last tax return, despite little changing in their business operations, processes and income. What needs to be discussed with the client and, if they insist on going ahead with the claimed figures, what are your next steps?
ROBIN: This is possibly a good, detailed review, especially if invoices/bills back them up. However, if there’s no documentary evidence of the expenditure, one will need to investigate how it was paid. If it’s via a bank, it should be possible to search for the supplier and get the documentation. If it’s in cash and the documents are scraps of paper with no details of the supplier, one would need to ask the client for more details. If none are forthcoming, tell them it will go to drawings or a director’s loan account. A report to the relevant authorities should also be made.
BILL: Identify specific increases and ask for documentation. Compare the data to industry standards. Explain tax regulations to your client, including allowable deductions, and highlight the risks. Exercise professional scepticism, keeping detailed records. Follow professional standards and consider reporting obligations. Also consider the option of disengagement.
SULMAN: Upon detailed review of the client’s financial information, a tax consultant should explain relevant tax laws and regulations related to deductions and ensure the client understands the rules governing each deduction category. Discuss the risk of an audit if the claimed figures appear unusual, and emphasise the importance of accurate reporting. If you believe the deductions are inflated or unsubstantiated, recommend adjusting them to more realistic levels. If your client still insists on going ahead with the claimed figure, advise them to maintain thorough documentation to support their deductions and assess the potential risk to the client if the deductions are challenged during an audit. Keep detailed records of your discussions, recommendations, the client’s decisions and document your reservations. You should ensure compliance with tax laws and ethical standards.
TIM: The firm will need to discuss and understand the nature of the claimed tax deductions to get the full picture. If the claims cannot be justified then this is a potential breach of the Code of Ethics and Professional Conduct in Relation to Taxation (PCRT) in relation to professional behaviour. The PCRT states, ‘A member must comply with all relevant legal and regulatory obligations when dealing with a client’s tax affairs and assist their clients to do the same. A member who has reason to believe that proposed arrangements are, or may be, tax evasion must strongly advise clients not to enter into them. If a client chooses to ignore that advice, it is difficult to envisage situations where it would be appropriate for a member to continue to act other than in rectifying the client’s affairs.’ Therefore, if a firm provides tax advice to a client and the client does not act in accordance with that advice, then consideration should be made as to continuing with the engagement or disengaging, citing professional differences. The firm should also consider its AML reporting obligations and submit a SAR.
