Why ethical letters are vital in new client relationships

Content Summary

Luke Dodemaide | June 2021

This article was current at the time of publication.

Ethical letters help to form the backbone of accounting standards and can be found under APES 110 Code of Ethics for Professional Accountants

They serve in developing a new client relationship or as an outgoing postscript addressed to the previous accountant.

Ethical letters also play an important role in ensuring accountants adhere to the public interest and consider due diligence before formalising a relationship with a prospective client.  

The letters are written by the new accountant who has been approached, and then received in good faith by the accountant relinquishing the client. They outline key information honestly and unambiguously. 

Once a professional courtesy, the introduction of NOCLAR requirements made it mandatory business practice. However, this has not made the process more formal, and in some cases, it is unfortunately neglected. 

“I remember when all ethical letters were prepared formally on firm letterhead and sent by mail,” says Tony Tassone CPA, Senior Assessor – Best Practice, Public Practice and Professional Standards at CPA Australia. 

“With the introduction of email, these letters became attachments to emails for a while. In recent years, matters of an ethical letter are at times simply raised and responded to in the body of the email as a quick and simple solution.”

Considering ethical letter contents

“Letters should stick to the requirements,” Tassone insists. “[They] should contain something like asking the existing or [previous] accountant whether they are aware of any professional or ethical reasons for not accepting an engagement.”  

In terms of style, accountants need to stick to the code (APES 110) and use appropriate tone. Any questions outside these areas can be addressed later. 

“Further requests for client information should be made later – if applicable – once acceptance and terms of the engagement have been agreed, and with the client’s consent having been obtained and communicated to the [previous] accountant,” Tassone says.

When receiving an ethical letter, you are generally expected to provide financial statements, income tax returns and other documents deemed necessary. 

For both parties, it is worth remembering that the actions in these proceedings can be “answerable to professional conduct review and disciplinary action according to their respective membership rules and by-laws”, APES 110 states. 

While ordinarily smooth sailing, practitioners should be prepared for responses containing unexpected news. “The more surprising letters would be in relation to NOCLAR,” Tassone suggests. 

“That is, the predecessor accountant responding to an ethical letter and disclosing a matter of non-compliance with the law or regulations or suspected non-compliance.”

The importance of cordial client handovers

A key to ensuring a positive transition of business from one accountant to another, as well as maintaining fundamental principles, is to involve the client in the handover of sensitive data. 

“If possible, leave on amicable terms and understanding and be sure to have the client provide consent to obtain all of the information needed, including, for example, electronic copies of files,” Tassone advises.

While it sounds obvious, errors in the ethical letter process can arise at the point of address. 

Even in emails, the letter should be directed specifically to the accountant responsible for the professional service previously provided. 

“Not a staff member of the firm,” Tassone emphasises. “And it should be timely. More specifically, sent at the time when assessing acceptance and not once the engagement has been agreed.”

Dealing with ethical letters

Tassone, a former public practitioner with 30 years’ experience, says significant problems in ethical letters are rare. 

“I’ve never witnessed a complaint in the process of an ethical letter,” he says. “While no accountant wants to lose a client and receiving an ethical letter can come as a surprise, generally ethical letters are responded to.

“I’ve had letters not responded to or responded to after some time … [yet] enquiries received have generally been sufficient to make an appropriate determination regarding acceptance of the new client engagement.” 

This does not make it an easy bar to clear, but a standard to uphold, Tassone adds. 

“Members in Australia and in New Zealand are required to comply with the code. In addition to referring to the code, CPA Australia provides a Client Relationship Guide dealing with issues to consider for new, existing and departing clients.”