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Code of Professional Conduct - Managing conflicts of interest exposure draft TPB(I) D19/2013

Exposure draft
TPB Information Sheet TPB(I) D19/2013

Code of Professional Conduct - Managing conflicts of interest

This exposure draft is also available as a PDF (577KB) download: 

 

The Tax Practitioners Board (TPB) has released this draft Information sheet as an Exposure draft and invites comments and submissions in relation to the information contained in it within 45 days. The closing date for submissions is Friday 13 September 2013. The Board will then consider any submissions before settling its position, undertaking any further consultation required and finalising the Information sheet.

Written submissions should be made by the closing date to Neil Pegg via email at tpbsubmissions [at] tpb.gov.au or by mail to:

Tax Practitioners Board
PO Box 126
HURSTVILLE NSW BC 1481

DISCLAIMER
This document is in draft form, and when finalised, will be intended as information only. While it seeks to provide practical assistance and explanation, it does not exhaust, prescribe or limit the scope of the Board’s powers in the Tax Agent Services Act 2009 (TASA). The principles and examples in this paper do not constitute legal advice. They are also only at a preliminary stage. The Board’s conclusions and views may change as a result of comments received or as other circumstances change.

Document history
This draft information sheet was issued on 30 July 2013 and is based on the TASA as at 30 July 2013.

Introduction

  1. This Information sheet has been prepared by the Tax Practitioners Board (TPB) to assist registered tax agents and BAS agents (registered agents) to understand their obligations under the Code of Professional Conduct (Code).

  2. All registered agents are required to comply with the Code, which is contained in section 30-10 of the Tax Agent Services Act 2009 (TASA).

  3. This Information sheet provides guidance on the application of Code Item 5, which is one of the 14 principles contained within the Code.

  4. In this Information sheet, you will find the following information:

  • what is Code Item 5
  • how to comply with Code Item 5
  • consequences for failing to comply with Code Item 5
  • practical examples involving Code Item 5.
  1. The TPB has published an explanatory paper that sets out its views on the application of the Code, including Code Item 5.[1]

What is Code Item 5?

  1. Code Item 5 provides that registered agents must have in place adequate arrangements for the management of conflicts of interest that may arise in relation to activities that are undertaken in the capacity of a registered agent.

  2. Adequate arrangements for the management of conflicts of interest assist to minimise potential adverse impacts on clients and others. This in turn helps to promote consumer protection and maintain integrity of the profession.

  3. Code item 5 does not prohibit registered agents from having conflicts of interest. However, it does create an obligation to appropriately manage conflicts that arise or may arise in relation to activities that are undertaken in the capacity of a registered agent.

  4. The Accounting Professional and Ethical Standards Board (APESB) has stated in APES 110 Code of Ethics for Professional Accountants that a member is required ‘to not allow … conflict of interest … to override professional or business judgments’.[2]

How to comply with Code Item 5

What is a conflict of interest?

  1. A conflict of interest is where a registered agent has a personal interest or has a duty to another person which is in conflict with the duty owed to the client.

  2. A conflict of interest may be an actual or potential conflict and can arise before the registered agent accepts an engagement or at any time during the engagement. A registered agent has a duty to manage actual and potential conflicts of interest.

  3. An actual conflict of interest arises where a registered agent has multiple interests and cannot objectively and impartially act in one of the interests.

  4. A potential conflict of interest arises where a registered agent has multiple interests and one interest could possibly impact the motivation to act for another interest.

What are adequate arrangements for the management of conflicts of interest?

  1. Registered agents must have adequate arrangements to identify and manage conflicts of interest that arise or may arise. A determination of whether conflict management arrangements employed by a registered agent are sufficiently adequate will be a question of fact having regard to the particular circumstances of the matter in question.[3]

  2. A number of mechanisms could be used to manage a conflict and it will be up to a registered agent to exercise their professional judgement to determine the most appropriate method for managing a particular conflict of interest.

  3. Three mechanisms that registered agents may use to manage conflicts of interest are:

  • avoiding conflicts of interest
  • controlling conflicts of interest, and 
  • disclosing conflicts of interest.

Avoiding conflicts of interest

  1. Registered agents are required to ensure their objectivity is not impaired by a conflict of interest. In some cases, regardless of arrangements put in place, conflicts of interest will be unmanageable and the only way to adequately manage the conflict will be to avoid it altogether. This will generally require the registered agent to decline to act for the client.

  2. Depending on the circumstances, a registered agent may also be able to avoid a conflict of interest by physically and intellectually separating and isolating persons within the registered agent practice who will provide the relevant advice from persons who are privy to material information which may influence the advice. This is sometimes referred to as a ‘Chinese wall’.

  3. In some cases, Chinese walls may be an ineffective form of conflict management, noting that there is a risk of leakage and that there also needs to be an appropriate understanding of written policies and procedures.[4]

Controlling conflicts of interest

  1. Controlling conflicts of interest requires a registered agent to:

  • identify the conflicts of interest relating to the tax agent or BAS agent practice
  • assess and evaluate those conflicts, and
  • decide upon, and implement, appropriate responses to those conflicts.
  1. In some instances, it may be necessary and appropriate for a registered agent to suggest to their client that, notwithstanding any advice provided by the registered agent, the client should obtain independent advice in the circumstances.

  2. In all cases, it is recommended that a registered agent keep adequate records of the steps taken to control conflicts of interest.

Disclosing conflicts of interest

  1. Where there is a conflict of interest, registered agents should disclose the conflict to their clients. Disclosure should:

  • be made at the earliest possible opportunity
  • be specific and meaningful to the client
  • occur before or when the tax agent service is provided, but in any case, at a time that allows the client a reasonable time to assess its effect, and
  • refer to the specific service to which the conflict relates.
  1. The form of the disclosure must be sufficient to allow an informed decision to be made about how the conflict may affect the services being provided and about its management.

  2. Where a registered agent intends to accept instructions from more than one party to any transaction, it is recommended that, before accepting any form of consideration, the registered agent is satisfied that each of the parties is aware that the registered agent is intending to act for the others and that there is consent for the registered agent to continue to act.

  3. Further to paragraph 24 above, where one of the parties refuses to provide the requested consent, the registered agent should consider declining to act for that party.

Other techniques for managing conflicts of interest

  1. Additional techniques that may assist a registered agent to manage conflicts of interest include:

  • placing a positive onus on employees or anyone else providing relevant services on behalf of the registered agent to declare conflicts of interest, including reporting to appropriate people and signing relevant declarations as appropriate
  • developing a register of private interests (in conjunction with appropriate protocols) and regularly revising the register
  • reviewing conflict of interest declarations periodically
  • relevant training, including to employees or anyone else providing relevant services on behalf of the registered agent, to ensure appropriate awareness and understanding of what constitutes a conflict of interest and how to act in accordance with relevant internal procedures and protocols (including, for example, escalation procedures),
  • seeking advice from an independent third party, which may include legal advice. [5]

Consequences for failing to comply with Code Item 5

  1. If a registered agent does not have in place adequate arrangements for the management of conflicts of interest that may arise in relation to activities that are undertaken in the capacity of a registered agent, the TPB may find that the registered agent has breached the Code and may impose sanctions for that breach.

  2. If a registered agent breaches the Code, the TPB may impose one or more of the following sanctions:

  • a written caution
  • an order requiring the registered agent to do something specified in the order
  • suspension of the registered agent’s registration
  • termination of the registered agent’s registration.
  1. In addition, the same conduct which may amount to a failure under Code Item 5 could also constitute a breach of another Code Item (such as confidentiality and acting with honesty and integrity).

Practical examples involving Code Item 5

  1. The following are indicative examples which illustrate the general application of Code Item 5.

  2. In all cases, consideration will need to be given to the specific facts and circumstances. In any given situation, a number of mechanisms could be used to manage a conflict and it will be up to a registered agent to exercise their professional judgement to determine the most appropriate method for managing a particular conflict of interest.

Example 1 – Marital break-up

Situation

Terrence and Sandra have recently divorced. They have used the same registered tax agent, Craig, for the past 7 years. In preparing their respective income tax returns for the current financial year, it becomes apparent to Craig that the claiming of a rebate or offset by Terrence would prevent the claiming of the rebate or offset by Sandra.

Conflict of interest

Craig has a conflict of interest if he acts for both Terrence and Sandra because they have competing interests in relation to the claim for a rebate or offset. Additionally, a perceived conflict may arise in regard to one or both of the clients holding any belief that Craig may not be able to objectively provide appropriate and impartial services to each of the clients.

Managing the conflict of interest

In applying his professional judgment, Craig determines that the rebate or offset is more properly claimable by Terrence. However, Craig also identifies that he is in a position wherein his duty to Sandra is in conflict with his duty to Terrence.
Craig appropriately discloses his conflict of interest to Terrence and Sandra and receives a waiver from both parties in relation to the conflict.

In this case, Craig has satisfied his obligations under Code Item 5 by appropriately disclosing his conflict of interest and obtaining a waiver from Terrence and Sandra prior to preparing their respective income tax returns.

Alternative scenario

If Craig were unable to obtain the relevant waiver from Terrence and Sandra, it is unlikely that he would be able to adequately manage the conflict of interest, regardless of other arrangements that could be put in place, and should consider declining to act for one or both of Terrence and Sandra.

Example 2 – Registered agent has a personal interest

Situation

Anthony is a long time client of Lucia’s, a registered BAS agent. Anthony asks Lucia to assist him to identify an appropriately qualified tax agent to provide advice in relation to his self managed superannuation fund. Lucia is aware of a number of suitable registered tax agents but refers Anthony to Nathan Accounting Pty Ltd because she receives a commission for the referral from this firm.

Conflict of interest

Lucia has a financial incentive in referring Anthony to Nathan Accounting Pty Ltd as opposed to another registered tax agent and, therefore, has a conflict of interest in the circumstances.

Managing the conflict of interest

Lucia appropriately discloses her conflict to Anthony by advising him that she will receive a commission if he engages the services of Nathan Accounting Pty Ltd.
In this case, Lucia has satisfied her obligations under Code Item 5 by disclosing her conflict of interest to Anthony when referring him to Nathan Accounting Pty Ltd.

Example 3 – Clients in the same industry and registered agent with personal interest

Situation

Christina is a registered tax agent and has a number of long time clients, one of which is Cold Cream, a large ice-cream retailing franchise. Christina has a 15 percent ownership interest in Cold Cream.
Christina is approached by Ice Cold, a rival ice-cream retailing franchise to provide tax agent services including tax planning work.

Conflict of interest

Christina has a potential conflict of interest if she provides tax agent services to Ice Cold because her ownership interest in Cold Cream could possibly impact her motivation to act for Ice Cold.

Managing the conflict of interest

Christina appropriately discloses her conflict of interest to Ice Cold. Further, Christina determines that, in the circumstances, she cannot objectively provide tax agent services to Ice Cold and therefore the conflict of interest is unmanageable and the only way to adequately manage the conflict will be to avoid it altogether. Accordingly, Christina declines to act for Ice Cold.

In this case, Christina has satisfied her obligations under Code Item 5 by disclosing her conflict of interest, and avoiding the conflict by declining to act for Ice Cold.

Example 4 – Representing two clients involved in a merger transaction

Situation

Victor Lance Accounting, a large accounting firm and registered tax agent, is engaged by Caxton Pty Ltd and Devon Pty Ltd, two publicly listed companies, to provide confidential tax advice in relation to a potential merger transaction with one another.

Conflict of interest

Victor Lance Accounting has an actual conflict of interest if it acts for both Caxton Pty Ltd and Devon Pty Ltd because both companies are seeking confidential tax advice from the same registered tax agent.

Managing the conflict of interest

Victor Lance Accounting appropriately discloses the conflict of interest to both Caxton Pty Ltd and Devon Pty Ltd. Further, Victor Lance Accounting advises each of the companies of how it intends to control and avoid the conflict of interest. Relevant strategies include identifying and evaluating the conflict of interest, implementing and enforcing strict polices and procedures in relation to controlling the conflict, and assigning separate teams in different offices to work for the two companies. Finally, Victor Lance Accounting obtains a waiver from each of the companies in relation to the conflict.

By taking these steps, Victor Lance Accounting has satisfied its obligations under Code Item 5 to have in place adequate arrangements for the management of the conflict of interest.

1. Refer to paragraphs 64 to 77 of TPB(EP) 01/2010 Code of Professional Conduct
2. APESB APES 110 Code of Ethics for Professional Accountants, section 100.5.
3. See, for example, ASIC v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963.
4. See, for example, ASIC v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; Bureau Interprofessional des vins de Bourgogne [2002] FCA 588.
5. See, for example, APES 110 Code of Ethics for Professional Accountants, sections 220.4 and 310.3.