Editor’s Note: “War Stories,” drawn from Camico claims files, illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.

John and Karen Smith, long-term clients of your firm, are in the midst of a divorce. John is an old friend from college, and you have advised him on tax and accounting matters for more than 15 years. When he and Karen wed 10 years ago, you began to provide services to them as couple. Your family and theirs are quite close, and you are deeply saddened by the news of their impending split. 

As part of your “high-touch” client service philosophy, you had been meeting quarterly with the couple to discuss their business and individual tax needs. John and Karen own a popular upscale restaurant, which has been extremely successful and was rated one of the top 10 restaurants in the area.

The couple have asked you to help them navigate this troubling time, and you have agreed to do so, given your long relationship with them. You are impressed by the spirit of cooperation they display and their willingness to settle the divorce amicably and in the best interests of their children. Not anticipating difficulties, you don’t request that they sign a conflict-of-interest waiver. 

In recent months, however, the negotiations between John and Karen have steadily deteriorated, and they are now communicating with each other only through their attorneys. You are in the process of finalizing the preparation of their joint federal and state personal income tax returns as requested, which are due in 12 days, when you receive a disturbing email from John. The email indicates that his attorney has advised him to file a return as Married Filing Separately instead of Married Filing Jointly, as he and Karen had previously agreed. 

John also states, among other things, that he is “done taking care of Karen. She will need to figure out her own tax situation with her louse of an attorney…. You are my advocate, not hers.” In reading the cryptic message, you are not sure what John means by it and, more importantly, how it may impact your relationship with Karen and the services you have agreed to provide for them both. 

What do you do now?

A. You send a disengagement letter to Karen and request that she gather her documentation and engage another tax professional as soon as possible in order to complete her returns in a timely fashion.
B. You contact your risk adviser or legal counsel for assistance.
C. You immediately send both John and Karen a conflict-of-interest consent and require both parties to sign their acknowledgment before deciding what to do next.
D. You ask your spouse to speak with John “as a friend” to help diffuse the tension and conflict between John and Karen.

Answers
A. Incorrect. Ultimately, you may need to disengage from one or both parties, but if you don’t seek advice from your risk adviser or legal counsel first, you may inadvertently create even more risk exposure for yourself. For example, Karen may allege that you favored John in the tax filing. She could argue that you abandoned her a few days before the tax deadlines and, to her detriment, took an adverse filing status position. Divorce situations necessitate that CPAs treat each spouse equally, regardless of any prior relationships or which spouse has more marital assets or is paying the fees.

B. Correct. This is a highly charged situation. Divorcing couples—and partners in litigation with each other—often try to assert that the work of the CPA benefited one spouse/partner more than the other. It may be appropriate to disengage from one or both parties, even though that creates challenges, too. If you disengage before completing work for one spouse, and a successor CPA is unable to finish the returns by the deadline, the delay could cause the disengaged spouse to incur penalties and/or miss a tax opportunity. Your risk adviser or legal counsel will assist you in determining the extent of your conflict through the use of the “reasonable person” test—i.e., posing the question, “What would a reasonable person think in this situation?” An adviser will also help you evaluate alternatives in light of your professional obligations to each spouse. No one solution fits all divorce scenarios.

C. Incorrect. Although this might be one option in managing the exposure, it won’t be easy to get the parties to sign waivers now that the relationship has deteriorated. John has already made the statement to you that you are his “advocate,” so he has staked claim to your professional expertise. Although representing both spouses is not prohibited, this scenario illustrates why it is rarely advisable. However, if you do decide to represent both spouses, always inform both parties and have each acknowledge your potential conflict of interest as a form of protection before proceeding.

D. Incorrect. It is extremely important to keep your professional relationships separate from your personal relationships during the normal course of business, and this type of scenario is no exception. You are already in “murky water” and don’t want to make matters worse by risking an allegation that you breached client confidentiality by sharing private information with a third party (e.g., your spouse). 

Suzanne M. Holl, CPA, is vice president of loss prevention services with Camico. With more than 18 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide Camico’s policyholders with information on a wide variety of loss prevention and accounting issues.