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 mandatory in the following circumstances:

• to comply with the ICAEW Audit Regulations where a registered auditor is a sole practice; and
• to comply with the ICAEW Clients’ Money Regulations, where a sole principal operates a client money account.

However, even if appointing an alternate is not a regulatory requirement, it is recommended that a sole principal appoints an alternate in order to meet public interest considerations, to protect the consumer, ensure continuity of service in the event of the death or incapacity of the sole practitioner, and to preserve the goodwill of the practice.

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:

• Statutory deadlines may be missed with resulting late filing penalties for clients.
• Work in progress on a particular professional assignment may become valueless unless the task is completed within a reasonable time period.
• Debts can be difficult to collect.
• Clients and consumers of the services may be inconvenienced or compromised by the cessation or interruption of services, which for time sensitive work, could have a huge knock-on effect to many, for example, if the sole practitioner does weekly/monthly payroll 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.

Mandatory appointment of an alternate where a registered auditor is a sole practice, as per audit regulation 2.02A, is a requirement from 1 June 2025 with a six-month transition period. Therefore, sole practitioner auditors must appoint an alternate by 1 December 2025. Sole practitioner auditors must confirm to the Audit Registration Committee (ARC) that an alternate arrangement is in place for the audit work they undertake by emailing annualreturns@icaew.com.

The Audit Regulations require a sole practitioner to inform ICAEW as soon as possible, but within ten working days, of any change in the name and address of the alternate, or whether the arrangement has ceased.

Who can be an alternate?

An alternate should be a suitably qualified individual who is a member of a Recognised Supervisory Body, i.e. a member of any of ICAEW, the Institute of Chartered Accountants of Scotland (ICAS), Chartered Accountants Ireland (CAI), or the Association of Chartered Certified Accountants (ACCA).

There is no requirement for the alternate to be a Responsible Individual (RI) or to hold a practising certificate, however this may change depending on course of action if the alternate has to “step-in”. For example, an alternate who is not already an RI will have to make an application to ICAEW using the Responsible Individual application form and will not be able to complete any audit work (e.g. sign audit reports) until ICAEW has approved their status. An alternate who is already an RI, cannot simply transfer their licence to new sole practitioner’s practice. They will need to apply and be approved, for RI status in the sole practice before being able to complete any audit work, but the application process will be more straightforward than if the alternate was not already licenced for the work in their own practice (the form linked above should be used).

What is an alternate expected to do?

In the event of the death or incapacity of a sole practitioner, an alternate is required to facilitate the continuation of the practice or effect a timely transition of clients to another auditor, depending on the circumstances in which the alternate’s services are required. There is no requirement for the alternate to undertake the business of the sole practitioner, but the alternate may choose to do so.

For a firm registered 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 2.11).

In cases where the alternate is required to undertake statutory audit work as part of their role, and for the firm to continue as a registered audit firm, 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 and the RI. 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. To apply for a dispensation, complete the notification of arrangements form and email it to annual.returns@icaew.com.

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. If 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. However, it may be sensible to discuss the need for a new audit appointment with fellow executors/beneficiaries to avoid any perception of unethical behaviour.

Regulation 31 of the Client Money Regulations states:

“a firm (which term includes a sole practitioner) which is wholly owned and/or controlled, whether directly or indirectly, by a single member may not receive or hold clients' money unless it has arrangements with another appropriately qualified firm or person to enable the proper distribution or processing of clients' money held by the firm in the event of the incapacity or death of the member”

Notification of such arrangements must be made in writing before or immediately following the first receipt of clients' money by the firm or notified via the firm's next annual return to ICAEW and immediately following any change (including cancellation) in the arrangement.

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/alternate 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.

Whilst an agreement can take any form, and could be a verbal agreement, it is good practice to have a legally binding written agreement and, if necessary, seek legal advice. One advantage of a written agreement is that in the event of the death or incapacity of the sole practitioner the alternate will be able to demonstrate that they are acting with proper authority.

Even in a simple agreement, the following are examples of items we might expect to be included:

• in what circumstances the alternate’s services would be required;
• what the role of the alternate is;
• what is, and what is not, expected of the alternate;
• who else might be involved (e.g. sole practitioner’s family members, solicitor etc);
• what access and powers will the alternate have in relation to, for example, bank accounts, staff, client information;
• key information, for example, details of bank accounts and insurance;
• the impact of the alternate on professional indemnity and other insurance;
• how conflicts of interest will be dealt with;
• whether the alternate will be remunerated;
• confidentiality; and
• termination of the agreement.

Please note, this is not an exhaustive list, and we strongly recommend a legal review of any alternate agreement before finalising and signing.

Consideration could also be given to the following options:

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, but may not be suitable for either the sole principal or alternate in other situations where an alternate needs to step in.

For example, 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.

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”, is likely to be affected and action would be needed in relation to authorisations in reserved areas. The process in relation to audit is set out above.

Lasting Power of Attorney (LPA)

If you have a Lasting Power of Attorney (LPA), you could make the alternate an attorney so that they can make decisions for the sole practitioner in relation to money and property. An LPA would, for example, enable the alternate to access the bank account and pay bills. If the sole practitioner is a sole director, they must ensure that they have the authority under the company’s articles to delegate by LPA. There is guidance on gov.uk and legal advice should be taken.

A mutual support scheme

Another option is for an arrangement through a “mutual support scheme” amongst a group of practitioners. Under this arrangement should one member of the group require the services of an alternate, an alternate will be drawn from one of the other group members. It is important that any such collective agreement is documented, so that in the event of a practitioner having to act as an alternate for another member of the group, the alternate can demonstrate that they are acting with proper authority.

Charging your Executors with Responsibility to Find an Alternate (if not mandatory to have one)

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.

Alternatively, you could appoint the alternate as an executor in the will, with responsibility for administering the business portion of the estate. This would not be appropriate for an audit alternate.

Legal advice is strongly advised in structuring any of these agreements.

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 for regulated firms, or Technical Advisory Service on +44 (0)1908 248 250 or via webchat.

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)?
• 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? Would the alternate prefer to manage the transition of audit client clients to another auditor?
• Conflicts of interest: are there known conflicts of interest that would prevent or limit the alternate from acting? If so, the alternate would need to manage the transition of clients to another accountant/auditor rather than take on the clients themself.
• 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.

Where the sole practitioner carries out work licenced by statute (e.g. audit, investment business advice, insolvency or probate) it may be helpful to appoint an alternate who is already licenced to undertake such work in their own firm. As previously noted, the licences are not transferrable, and applications will have to be made if the alternate is to undertake licenced work when acting as an alternate.

There could be more than one alternate for, say, different types of work, and if so, there would need to be clarity on scope and authority for each alternate.

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.

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.

• We strongly recommend, that the sole principal ensures that close family or friends know that alternate arrangements exist, where details of these arrangements can be found and who to contact (a personal introduction to the alternate might be useful).
• Where there is an LPA the alternate arrangements ideally should be captured in that document.
• Staff and clients might also be informed of the arrangements to allay fears for the future.
• The sole principal should maintain adequate records in relation to their existing accountancy practice in an up-to-date form to enable the alternate to undertake their duties. This includes making provision for the alternate to have IT access to relevant files and systems.
• Whether or not the practice undertakes regulated work, the alternate would need to inform ICAEW about the change in principals and ensure that the practice continues to be supervised for anti-money laundering (or seek anti-money laundering supervision elsewhere). It would therefore be sensible that the sole principal makes the alternate aware of such obligations.
• It may also be appropriate for the sole principal to have a discussion with family/beneficiaries about the ultimate future of the practice. Depending upon the sole principal’s wishes, the practice may be transferred to another practitioner or may be sold on the open market. It is not improper and may be advantageous to all parties for the alternate to agree to acquire the practice from the incapacitated member or their personal representatives. It is recommended that specialist agents be engaged to assist in the disposal of a practice. At the point of considering a specific sale of a practice, legal advice should always be taken.

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.