One of the most common issues our team of professional and ethical experts is asked about is what to do when clients divorce. 

Once you learn that your clients are divorcing, there are several things you need to do to ensure you protect your reputation, fulfil your obligation to act ethically, and safeguard the interests of all parties.

1. Work out who is your client

One of the first things is to determine who is your client. You may have more than one. That way, you'll better understand where your obligations lie. For example, you may look after both members of a couple for their individual tax returns as well do the accounting and tax for their business (a company). That makes three separate clients.

Approach the spouses as individual clients. Ensure you have separate engagement letters and you deal with them separately with respect to their individual tax situations.

For the business, if one spouse is a director and the other is only an employee, the employee has no rights to information about the business. Similarly, if one spouse is a shareholder (but not a director) or the beneficiary of a trust (but not a trustee), they'll have no automatic right to information about the business.

Difficulties can arise if both don't understand their rights to information and decision making. Things can get complicated if both spouses are directors, trustees, or partners. You need to deal with them jointly and include both in all communication pertaining to the business – even though you may get caught up in some uncomfortable conversations.

"Even in cases where you feel that one individual is in the wrong, it's not your place to take sides."

2. Stay objective

Objectivity is a key principle under the Code of Ethics. When a relationship ends, emotions often run high – and it's easy to get swept up in the drama, feel one party is in the wrong or want to protect someone so you favour one spouse over the other. This can make it hard for you to give unbiased advice. Your own bias, the influence of one party, or even undue influence of another can all affect your ability to stay objective. That's why clients going through marital disputes commonly create conflicts of interest for accountants. 

Remember that it's as important to be seen to be objective, as it is to be objective. Avoid placing yourself in the situation where you might be perceived as favouring one client over the other. 

3. Act ethically

You have certain ethical obligations under the code to manage the risks that may arise during a client divorce. You’ll need to evaluate whether you can put safeguards in place to reduce the threats to your ethical principles to an acceptable level, or whether the only way to manage the risks is to disengage from one or more clients.  

Use the informed third-party test when assessing whether the threat level is acceptable. This test asks whether an independent person, understanding all the facts and circumstances, would come to the same decision as you.  

• If you decide you can continue, implement safeguards to ensure each individual's matters are managed separately and kept confidential
• If you decide to continue and there are entities where both are directors (or trustees), treat them both equally, only acting on instructions when both parties consent to them in writing (email is fine) and providing any requested information to both parties. 
• If you decide you can’t manage the risks by putting safeguards in place, you will need to disengage from one or more clients - spouses and family company (or trust) if this exists. 

4. Sort out the administration

If you continue to act for the spouses, your documentation may become out of date as a result of a separation or divorce. As such, you may need to issue new engagement letters for each individual, as well as one for each business entity – and make sure they get signed! You may find CA ANZ's engagement letter tool helpful.

Let your staff know about the change so they can put proper protocols in place to maintain and manage client confidentiality.

Likewise, update client contact details such as email addresses (beware the joint email address), phone numbers, and residential addresses to ensure information is getting to the right people.

Bank accounts should also be confirmed if there was one joint account and separate accounts are now required to deposit tax refunds or the like.

5. Get consent to continue

If you decide you can continue to act for each person, as well as for the joint entity if there is one, you'll need to gain consent from each client. The objective is to be as transparent as possible. 

You should also provide a letter to each party to express that the relationship breakdown creates  a conflict of interest situation – or at least the perception of one – and how you propose to manage it if you decide to act for more than one party.

• New Zealand members must apply the procedures in the NZICA Code. If you decide to continue you must disclose the conflict (including the related safeguards) and receive client consent to continue to act in writing.
• APES 110 for Australian members emphasises it is generally necessary for members to disclose the conflict of interest and obtain client consent.  

If one client does not accept the proposed arrangement, you might still be able to act for the other – but not for any entity that would require the consent of both directors. You should also provide clear instructions – preferably in writing – to the client who doesn't wish to retain your services that they may use another accountant. 

6. If it all falls apart

Remember, this isn’t a set and forget activity. It’s not uncommon that working with divorcing clients can start amicably, and later result in irreconcilable problems, especially if they are both business directors (or trustees of a trust) – for example, where they're giving contradictory directions.

Ultimately, if you can't get clear instructions and agreement from both spouses, you may need to stand down as an adviser for the shared entities. Of course, this won't be necessary in all cases, but may be the outcome if you're unable to work effectively in the best interests of all parties.

CA ANZ’s Conflicts of Interest guide outlines your obligations and how to navigate conflicts of interest in more detail. Example 4 addresses how to deal with divorcing clients.