Clients' Marital Problems Land CA in Hot Water

Beyond Numbers, Aug 2004 by Utley, Chris

In my April 2004 column, I talked about the problem of married clients expecting their accountant to serve them both as they undergo a divorce, and the likelihood of one or both parties being disappointed. Add to this dilemma of marital troubles an old friendship or an obligation owed to one of the spouses, and a CA is really headed for trouble.

As you'll see, our member "Jeff" managed to make this scenario even worse.

This fictionalized account is based loosely on an actual case before the Professional Conduct Enquiry Committee (PCEC). Names and circumstances have been changed to preserve anonymity.

The situation

Jeff and Don met in high school. They renewed their acquaintance when Don approached Jeff to handle the tax returns for his new business. Over coffees, meeting with bankers, golf games, and tax deadlines, the two became friends. Jeff thought that because he excluded auditing from his practice, he wouldn't have to worry about his friendship with Don affecting their professional relationship. And maybe he would have been right-if Don had never asked him to help deceive his wife Helen.

By the time Don asked for this "personal favour," the wholesale distribution company he co-owned with Helen had become Jeffs biggest review client. Over time, the company had given the couple an enviable amount of leisure time and money. As their accountant and consultant, Jeff had contributed significantly to their success.

But this perfect picture threatened to collapse when Helen discovered that Don was having an affair. And being caught meant Don was also in trouble with his lover Sally, having promised to pay six months of her rent in the event of a break-up. So while Helen demanded an immediate end to Don's affair, Sally demanded her rent cheque.

Don turned to his buddy Jeff for support. Together, they decided that Don would give Jeff a company cheque in the amount of $1,200 for Sally's rent. This cheque was recorded in the company's books as payment for "professional fees." Jeff then deposited the cheque into his practice account and wrote Sally a cheque for the same amount.

To further cement their friendship, Don wrote Jeff another company cheque-this one for a $5,000 loan to help Jeff deal with some financial difficulties.

What happened

Helen found these two cancelled cheques and couldn't understand why Jeff's fees were so high. When she confronted Don, he stonewalled her and limited her access to the business records. Helen then wrote to Jeff demanding an explanation, but Jeff ignored her letters and subsequent letters from her lawyer. Stymied, Helen's lawyer sent the letters to the Institute.

Before the PCEC authorized an investigation, the Institute received a letter from Jeff in which he described the two company cheques as payments for his professional services. But Helen told the Institute a different story-apparently Jeff had contacted her, explaining that the $5,000 cheque was actually a loan from her company.

With potential violations of professional conduct Rules 201.1 (Reputation of the Profession) for failing to respond to Helen; 204.1 (Objectivity for Assurance and Specified Auditing Procedures Engagements) for accepting an assurance (review) engagement while indebted to the company; and 205 (a) (False or Misleading Documents) regarding Jeff's letter to the Institute and the misleading financial statements, the PCEC knew it had to investigate the matter. And it was during this investigation that Sally's rent cheque came to light.

The outcome

Jeff attended the PCEC meeting and managed to make matters even worse-refusing to explain the rent cheque on the grounds that it related to a "personal matter." But the PCEC determined that since the rent cheque had gone through Jeff's client's financial statements, what may have started out as a "personal matter" had become a professional one.

With regard to the loan, Jeff argued that it hadn't affected his objectivity because it didn't span a year-end and because he'd repaid it within three months-before his review work had started again. He gave the PCEC a copy of a bank draft to prove it.

Again, the PCEC didn't agree and determined that receiving a loan during the review engagement period should have precluded Jeff from accepting the engagement, regardless of whether or not he repaid it before the year-end.

Ultimately, the PCEC determined that Jeff had breached all of the rules noted above and recommended an anonymous reprimand, a large fine, and the costs of the investigation. The PCRC considered the materiality of the amounts involved in its deliberations.

The message

Avoid acting for both clients when their marriage is unravelling. And-at the very least-don't help one deceive the other even if you think you're acting as a "friend" and not an accountant.

Please note: The contents of this article are only for the general guidance of readers. The PCEC deals with each case individually, based on its specific facts and circumstances.

By Chris Utley, CA, Director of Ethics

Comments or questions? Contact me at utley@ica.bc.ca.