As an Alberta CPA, you may be asked about purchasing “audit insurance.”
A policy of audit insurance is carried by a professional accounting firm. Claims against that policy are triggered by an audit, enquiry, investigation, or review of certain filings, including those relating to the following: corporate tax, personal tax, capital gains tax, business audits, payroll audits, employer compliance audits, and GST/HST. The policy purports to cover the firm’s professional fees, up to a maximum amount, when a client is compelled by a tax authority, such as the Canada Revenue Agency, to act in some way in respect of its filings.
The terms of specific audit insurance products may differ. For example, the terms and conditions, policy coverages and exclusions, and how clients are to be marketed can vary from product to product. As with any new product, Alberta CPAs should carefully consider how it may impact their professional obligations.
The fundamental principles governing the conduct of CPA Alberta registrants, including members and firms, are set out in the CPA Alberta Rules of Professional Conduct. The Preamble to the Rules sets out the philosophy that underlies the Rules governing registrants’ responsibilities to those to whom professional services are provided, to the public, and to colleagues. One of the distinguishing elements of accounting as a profession is an acceptance by registrants of a responsibility to subordinate personal interests to those of the public good.
Given the nature of audit insurance, issues relating to independence, confidentiality, conflicts of interest, and trust funds, among other things, may come up. In an effort to facilitate registrants’ obligation to ensure compliance with the Rules, CPA Alberta has identified questions which should be asked by Alberta CPAs when considering whether a particular audit insurance product could result in a breach of a registrant’s obligations under the Rules.
Here is a non-exhaustive discussion of the Rules registrants should keep in mind when considering a particular audit insurance product and the terms and conditions:
- Rule 204 relates to independence. As contemplated in the Preamble, it deals with situations where a firm’s objectivity is under threat. It does not seek to curtail all activities which pose such a threat. Rather, Rule 204 requires a firm to identify and evaluate threats to its independence. For non-trivial threats where there is not a specific prohibition, the firm must apply safeguards to reduce the threats to an acceptable level. Where no such safeguards are available, the firm must not proceed with the practice. The audit of a client by the CRA could trigger a payout from the firm’s audit insurance; consequently, it may be perceived as a threat to the firm’s independence, as the firm can generate additional fees resulting from such an audit. As such, the firm would need to demonstrate that appropriate safeguards have been put in place.
- Rule 208 deals with confidentiality, one of the fundamental principles governing professional conduct. The Rule imposes strict constraints on a registrant’s use of clients’ confidential information. In particular, such information may be used only for specific purposes or with a client’s consent. Any disclosure of client information by a firm acquiring or making a claim under an audit insurance policy must be made in adherence with this Rule. Some audit insurance products may include a requirement for disclosure of the firm’s complete list of clients and information about the clients’ financial position, not just about those clients that opt for coverage. If a given audit insurance product includes this requirement, a firm should ensure that it handles its client’s confidential information appropriately and in compliance with Rule 208.
- Rule 210 deals with conflicts of interest. It, in part, requires a registrant to determine whether there is any influence or interest which would cause a reasonable observer to conclude that there is a conflict. The Guidance to Rule 210 reminds firms that conflicts can take three forms, which may overlap: professional conflicts, legal conflicts, and business conflicts. A business conflict may arise “when the business interest of a party to whom the registrant provides professional services is contrary to the business interest of the registrant…” If a firm has clients where some portion of the audit-related services are covered by audit insurance, the firm now has an interest in the work that does not exist in a situation where the client engages the firm when an audit arises. Some specific conflict issues that should be considered are:
- A client-firm relationship is defined in an engagement letter wherein the client engages the firm for specific services the client requires, and the client pays for those services. The client, therefore, knows what work is to be done. The cost for services not covered by a policy of audit insurance falls to the client to pay – on top of their audit insurance fee. In such a case, the client may have no information regarding the insurance claim that the firm makes with respect to that client’s work; or
- A firm, supporting a client during a CRA audit, must not be seen to have focused its effort on performing services which are covered under the insurance policy, at the expense of other services which may be required but that are not covered under the insurance policy. Firms need to consider whether audit insurance coverage offered by and through the firm could represent a real or perceived conflict of interest.
- Rule 612 deals with the handling of trust funds. The obligations that a firm has under this Rule may be triggered if the funds that the firm receives from a client for payment of an audit insurance premium are deemed to be paid in trust. A firm contemplating providing this insurance to their clients should consider what the nature of the fee revenue collected from their clients is since it is not fees for services provided.
Alberta CPAs and firms should be mindful of their obligations under CPA Alberta’s governing documents in all circumstances, including the purchasing of audit insurance. A breach of those obligations may constitute unprofessional conduct, in which case the CPA or firm could attract sanctions under Part 5 of the Chartered Professional Accountants Act, which can include fines, suspension, cancellation or costs of the discipline process.
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