ACCA - The global body for professional accountants

You are a sole practitioner and have recently taken over, as new clients, a partnership and the tax affairs of the two individual partners, who are otherwise unconnected.

You are just completing a set of accounts and have been informed that one of the partners is about to leave the partnership.

The partners have agreed the figure to be paid for the goodwill of the business (which is all internally generated and off balance sheet) and it has been further agreed between the partners that the outgoing partner will be paid the balance on his capital account.

The factory, which was owned jointly by the partners, has been included in the accounts at its historic cost, £79,000. In preparation for buying out the partner who is leaving this has been transferred into the name of the remaining ‘partner’, who has then taken out a mortgage on the property. For the purposes of the new mortgage the property has been valued at £150,000.

The partnership is a very profitable making bespoke curtains. The work is carried out by the lady partner, who will continue to trade as a sole trader, and a team of piece workers. Her partner had undertaken the administration and book-keeping for the partnership.

You are feeling uncomfortable about your position as you act as accountant to all three parties and you are also concerned that the partner who is leaving does not appear to be getting anything for his share of the increase in the value of the property. Do you have any responsibility to bring these matters to the attention of the partner who is leaving?


As adviser to the partnership and both the individual partners you have a responsibility to provide balanced advice and avoid any conflict of interest.

Adopting the Framework for decisions you need to ask yourself:

  • What is the real issue?
  • Are there threats to compliance with the fundamental principle?
  • Are the threats clearly significant?
  • Are there safeguards that will eliminate the threats or reduce them to an acceptable level?
  • Can you face yourself in the mirror?

What is the real issue?

The fact that it appears that the partners are relying on the accounts to determine the amount due to the outgoing partner when there are assets which are not reflected at their current value in the balance sheet does not of itself mean that this is unfair to the outgoing partner.

You will therefore need to take the following steps to establish whether or not there is indeed any reason to be uneasy:

  1. You should look to the partnership agreement, if one exists, to determine the basis on which the partnership should be dissolved. This may also contain details of the basis on which the factory was brought into the partnership accounts.
  2. If it transpires that there is no partnership agreement, it will be necessary to look to any partnership law for the jurisdiction in which the partnership falls, for example the Partnership Act 1890 in England and Wales or the Partnership Ordinance in Hong Kong, to see if this sets out how the assets are to be distributed on the dissolution of the partnership.
  3. In many jurisdictions, interests in land are held outside the partnership. It might, therefore, be necessary to look to the title deeds and any ancillary agreement relating thereto.
  4. Bearing the above in mind, it should also be pointed out that individuals are free to enter into such arrangements as they see fit; after all, one partner could gift their share of the partnership to the other.

    You will need to establish for yourself if the partners have arrived at this basis for dissolving the partnership because of the specific circumstances.

    For example it may have been agreed between the partners when they first went into partnership that, although they held the factory in joint names, since the continuing ‘partner’ had provided all the purchase consideration  it had been agreed between the partners that she would be entitled to any increase in value in the property.

Are there threats to compliance with the fundamental principles?

A threat to objectivity or confidentiality may [also] be created when members perform services for clients whose interests are in conflict or the clients are in dispute with each other in relation to the matter [or transaction] in question (ACCA Rulebook 2009 3.6 paragraph 1)

Therefore, if, after considering all of the above, you feel that the partner who is leaving has not made an informed decision to accept the balance standing to his credit in the balance sheet there may be a conflict of interests between the two partners with regard to the basis on which the partnership should be dissolved.

Where such a situation arises, Rulebook 3.6 paragraphs 18 states: “All reasonable steps should be taken to ascertain whether any conflict of interest exists, or is likely to arise in the future, both in regard to new engagements and to the changing circumstances of existing clients, and including any implications arising from the possession of confidential information.”

Conflicts between the interests of different clients is covered at Rulebook 3.6 paragraphs 14 – 17.

“There is, on the face of it, nothing improper in firms having two or more clients whose interests may be in conflict, provided that the work the firm undertakes is not, itself, likely to be the subject of dispute between those clients.” [3.6 paragraph 14]

Are the threats clearly significant?

If, after following the previous steps, it is clear that there is a conflict of interest then this will be significant because the accounts that you have prepared are likely to form the basis of agreement between the partners.

It is important to remember that perceived threats are as relevant as actual threats. The underlying test is whether :  “a reasonable and informed third party, having knowledge of all relevant information, including the safeguards applied, would conclude a firm’s ………… integrity, objectivity or professional scepticism had been compromised.” [3.4 paragraph 15(b)]

Are there safeguards that will eliminate the threats or reduce them to an acceptable level?

If you were part of a sufficiently large practice, it might be possible to put appropriate safeguards in place by ensuring that different partners acted for the different parties.

However, as a sole practitioner, if you establish that there is indeed a conflict of interest between the partners, you would no longer be able to act for all three parties: the individual partners and the business since work undertaken by you (the preparation of the accounts) is likely to become drawn into any dispute between the partners as to their rights on the dissolution.

If you were to continue to act for both of the individual partners you could be “forced into a position where [you] have to choose between the interests of different clients.” [3.6 paragraph17]

Ideally you should arrange a meeting at which both partners are present; explain the position to them and advise them that one or both should take independent professional advice on the dissolution of the partnership. If this is not possible, you should write to both partners setting out the position. You would still be able to continue to act for the business.

Can you face yourself in the mirror?

Having followed the steps set out above, it is likely that your unease will have been resolved and you can indeed ‘face yourself in the mirror’. It may be, however, that there are circumstances specific to the case, which have not been taken into consideration in the example above, which still leave you feeling uneasy. In that case you may have no alternative but to cease to act for any of the parties.

Last updated: 13 Mar 2012