Arrangements for alternates - guidance for sole principals

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members consider the practical implications for sole principals (either a sole practitioner or a sole director of a corporate practice or similar) in selecting and appointing an alternate.

Members may also wish to refer to the following guidance:

• Your guide to maintaining your firm’s record
• Arrangements for alternates – guidance for alternates

Alternates are currently only mandatory to comply with the ICAEW Clients’ Money Regulations where a sole principal operates a client money account., However, alternates are highly recommended for all sole principals (even where not holding client money) in order to meet public interest considerations, protect the consumer and to preserve the goodwill of the practice.

In cases where the practitioner carries out work licensed by statute (such as audit, financial service advice, insolvency and probate) having an alternate in place with the appropriate qualifications and registration can help to prevent the reserved service from being compromised by the practitioner being indisposed.

The requirements for mandatory appointment of alternates are currently under review and planned to be enhanced in the near future so members may wish to consider appointing an alternate in advance of this if they have not arranged so already.

All practitioners have an obligation to their clients to ensure that their practices are, at all times, properly supervised and conducted. This includes establishing arrangements to cover holidays and sickness. Problems can arise when a sole principal ceases to be able to conduct their practice because of continuing incapacity or death. These problems could include the following, although this list is not exhaustive:

• Work in progress on a particular professional assignment may become valueless unless the task is completed within a reasonable time period.
• Debtors can be difficult to collect.
• Clients and consumers of the services may be inconvenienced or compromised by the cessation or interruption of services
• Goodwill (basically the value attaching to the client list) can evaporate as clients move to find other accountants who will continue to provide services.
• Pressures may arise from client enquiries and claims concerning incomplete work, absence of service and missed deadlines.
• Professional indemnity insurance policy notifications of events/claims need to be properly satisfied.
• If the practice employs staff, redundancies may result from the effective cessation of the practice.
• Commitments in respect of rented offices or leased equipment will continue.
• Concerns about the uncertainty from clients/staff may add stress.

As you consider these types of problems it is easy to see how failure to appoint an alternate may expose the practice/estate to claims and complaints.

Simple Agreement That is Not Legally Binding

One approach is to put in place a simple agreement with an alternate. This may be helpful in respect of holiday absences or for short term illnesses other than mental incapacity.

However, in the event of death or mental incapacity an alternate should be aware that they might be acting without proper authority and would risk incurring liability for acts that were not properly authorised. The alternate could become liable to a subsequent claim for damages, perhaps by beneficiaries of the estate of the sole principal as a result of actions taken. This risk may be uninsurable (although it may be possible that the simple agreement could be a defence in a court by providing a clear indication of the sole principal’s wishes).

Also, the simple agreement may not be binding on the alternate should they not wish to act, leaving the sole principal’s representatives with a dilemma.

Another option is for an arrangement through a “mutual support scheme” amongst a group of practitioners. For example, one member of the group enters into an alternate arrangement and other members of the group are committed to act collectively to support the alternate. The same risks regarding a lack of authority to act could apply.

Charging your Executors with Responsibility to Find an Alternate

Under a will, the executor takes over title of the practice (but not the right to the practice’s description as a firm of Chartered Accountants or any of the practice’s regulatory authorisations). The sole principal’s property vests in the executor from the date of death. An executor may generally act before grant of probate (although the executor may be advised to seek legal advice on specific actions).

It may be difficult at short notice for the executor to find and appoint a suitable alternate.

Delays in appointing an alternate could lead to various issues for the practice, as discussed above, including an erosion of goodwill, deadlines being missed and clients being frustrated or left in the lurch.

Legally Binding Agreements Covering Incapacity and Death

Entering into a legally binding agreement is the recommended approach to provide legal continuity of the practice in the case of mental or physical incapacity, or death. Even so, the ability to continue the firm’s work in reserved areas (such as audit, insolvency work, investment business, probate. etc), and the use of the description “Chartered Accountants”, may be affected.

This approach consists of the following:

• Property and Affairs Lasting Power of Attorney (LPA) for the alternate to act during any period of incapacity (Enduring Powers of Attorney created before October 2007 are still valid), and
• Provision for the appointment of the alternate as a special executor in the sole principal’s will (other executors may be appointed in respect of the rest of the estate), and
• An acknowledgement of the arrangement appointing the alternate and specifying the terms and conditions.

A sole principal who is a sole director must ensure that they have authority under the company’s Articles to delegate by Power of Attorney.

Another approach may be to

• Identify a willing and able alternate,
• Appoint, say, next-of-kin/confidant, as both special executor under the will and attorney under an LPA, and
• Brief the next-of-kin/confidant to appoint the practising accountant to manage the practice.

However, if the alternate is unwilling to act, the next of kin will be obliged to try to identify and recruit another suitable alternate at short notice.

Legal advice is strongly advised in structuring these agreements.

The following points may be useful to consider when identifying an appropriate alternate:

• Skill set: does the alternate have familiarity with the type of work and a similar client base? Are you comfortable with their professional skills? Does the alternate have the skill set to run a practice (anti-money laundering, regulation, management of any staff. etc)?
• Powers: does the alternate have the appropriate licensing powers where there are reserved activities involved (eg audit, insolvency, financial services or probate)? It may be necessary to allocate work performed under these activities to a different alternate.
• Capacity: will the alternate have the spare capacity, when the time comes, to take on the extra work involved? This could be at a busy time of year. An alternate growing their practice may have capacity now, but will they in the future?
• Practicalities: Will the alternate be able to access files physically/electronically? Regular liaison about the systems, arrangements and client work of the practice makes sense. Will the bank recognise the authority of the alternate?
• Membership: If the firm no longer meets the definition of a ICAEW member firm (eg because the alternate is not an ICAEW member), the firm needs to apply for a dispensation within 14 days to be able to continue to use the description ‘Chartered Accountants’.
• AML: where the practice falls out of the member firm definition as a result of the alternate being a non ICAEW member then the automatic AML supervision by ICAEW will end immediately and the practice will need to apply for a contract for AML supervision.

Although there could be more than one alternate for, say, different types of work, there needs to be clarity on scope and authority for each alternate.

Client Money

The ICAEW Clients’ Money Regulations requires there to be an alternate in the event of the incapacity or death of the sole practitioner. The client account alternate can be a different person to the practice alternate and does not need to be someone capable of running the practice.

Sole principals should be aware that even the recommended approach is not comprehensive in the event of death. Banks will frequently refuse to allow an executor to operate a bank account until probate is granted. Sole principals should bear this in mind when informing clients of the arrangements that they have made and have a discussion with their bank to confirm how they deal with alternate arrangements.

Corporate Practice

An alternate would usually need to be appointed as a director of a corporate practice.

An alternate acting as an actual or de facto director should take care to ensure that the company is not trading whilst insolvent:

• Cashflow may be affected by the incapacity or death of the sole practitioner.
• Where goodwill has been acquired by the corporate practice and is capitalised (eg through the previous acquisition of a customer list), its value may be significantly reduced due to a loss of clients.
• The director’s loan account will normally become repayable on death.
• Significant losses in the values of both debtors and work in progress may be suffered.

Expert advice may be necessary to navigate these unforeseen difficulties.

In considering whether the corporate practice continues to be an ICAEW member firm (eg for anti-money laundering supervision and use of the description ‘Chartered Accountants’), shareholdings need to be considered along with the make-up of the board of directors.

Audit

If a corporate firm is regulated for audit, the alternate would need to notify ICAEW as soon as practicable, but not later than 10 business days of the incapacity or death of the sole principal (ICAEW Audit Regulations and Guidance, para 2.10). The statutory auditor is the corporate firm, however ICAEW would need to fully reassess the corporate firm’s eligibility, including whether the alternate has the competence to undertake audit work. If the firm was to continue to be audit registered, the alternate would need to apply to become the firm’s designated Audit Compliance Principal, as well as Responsible Individual (RI) of the audit firm. There is also the requirement for shareholders with a majority of the voting rights to hold an appropriate qualification or be registered auditors, and if the shares are now held by the executors or under a LPA then this requirement may not be met (legal advice is strongly recommended prior to restructuring shareholdings). Under the Companies Act 2006 (Sch 10, para 6(3)), the firm would need to apply for a dispensation to be given three months to complete all the requirements. Failure to do so will result in the firm ceasing to be a statutory audit firm.

The death of a sole practitioner who is the registered auditor of a company gives rise to a casual vacancy. For any Companies Act 2006 engagements, the alternate will need to ensure that the auditor cessation notification procedures are complied with. Where the alternate is a registered auditor in their own right, they could accept appointment to fill this vacancy, taking sole responsibility for all aspects of the audit (facilitated via having access to the existing file, provided the alternate has been properly appointed to have authority to access the file). If the alternate does choose to accept the audit appointment, it may be sensible to discuss the need for a new audit appointment with fellow executors/beneficiaries to avoid any perception of unethical behaviour.

Where a firm is audit registered it will generally make things smoother if the alternate is an RI already. Any non-RI who was an alternate would need to go through the full application process to become an RI before any work could be completed on any audit clients. Where the alternate is already an RI they would still need to apply for RI status in the sole practice firm, but this process is quicker. It should be noted that no audit reports could be signed until ICAEW has confirmed the alternate is an RI of the sole practice firm.

For further advice on effects on practice structure and continuance for a sole practitioners firm please contact Regulatory Support via email on regulatory.support@icaew.com.

Investment Business Activity

If the sole principal is authorised by the Financial Conduct Authority (FCA) to provide investment business advice or corporate finance services, then the FCA should be contacted and their advice taken.

Where a Designated Professional Body (DPB) licence has been issued to the firm by ICAEW, the incapacity or death of a sole principal would be considered a change in circumstances per para 2.07 of the DPB Handbook. The alternate would need to notify ICAEW as soon as practicable but not later than 10 business days of the occurrence. ICAEW will then reassess the firm’s eligibility, including whether the alternate has the competence to undertake this work.

It would generally be recommended to appoint an alternate who already holds their own DPB licence as this will help to ensure a more seamless continuation of services for clients.

Other ICAEW Regulated Work and Personal Appointments

ICAEW should be notified as soon as possible and specific advice sought for other ICAEW regulated work. Alternates should be aware that typically ICAEW regulations call for notification of changes in circumstances to be made within 10 business days.

In general, a personal appointment such as the sole principal having been appointed as a trustee or executor, would not usually be delegated to the alternate through an LPA, however legal advice may be needed.

For Insolvency and Probate assignments there are additional regulations and requirements with regards client handover. For these assignments specialist advice should be sought in additional to the general guidance in this document.

 The sole principal must ensure that:

• Professional indemnity insurance (PII) cover for the practice meets or exceeds all of the requirements set out in the ICAEW Professional Indemnity Insurance Regulations;
• Professional indemnity insurers have been notified of the identity of the alternate; and
• The alternate is notified of any steps that may be required to be taken in respect of PII cover on assuming responsibility for the conduct of the sole principal’s practice.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.