Alternate agreements

It has always been a good idea for a sole practitioner to have an alternate. However, it is important to note that since 6 April 2023, all sole practitioners who are registered for audit in the Republic of Ireland are required to have a formal arrangement in place with an alternate registered auditor. Alternate arrangements, or practice continuity arrangements, are formal arrangements between a sole practitioner auditor and another practising accountant which take effect in the event of the incapacity or death of the sole practitioner.

An alternate is the suitably qualified individual or firm appointed by a sole principal (sole practitioner or sole director of a corporate practice) to aid with the running of their practice in the event of their death or incapacity. The alternate doesn’t essentially have to run the practice., they need to facilitate the continuation of the practice in the immediate term. The sole practitioner should take steps to ensure that close family, friends and/or the sole practitioner’s solicitor know that alternate arrangements exist, where details of these arrangements can be found, and whom to contact in this regard in the event of the incapacity or death of the sole practitioner. A personal introduction to the alternate might be useful for the sole practitioner’s close family, friends and/or solicitor.

Staff and clients might also be informed of the arrangements. Clients may view the making of suitable alternate arrangements in a positive light and find that it can allay concerns about the possible interruption of service. In addition, members of staff may also find such information reassuring. Separately, it may also be appropriate for the sole practitioner to have a discussion with friends and family about the ultimate future of the practice in the event of long-term incapacity or death.

If the practice is a partnership or if there is a second director of a corporate practice an alternate agreement is generally not required.

Reasons to have an alternate

There is no general requirement as such for a sole practitioner to have an alternate. However, this article sets out four reasons why you might consider whether you should put this arrangement in place. The references are Audit Regulations 2.02, the Public Practice Regulations 6.29 and 9.25. The definition of a sole practitioner under the Audit Regulations includes a corporate practice which has a single director.

Scenario 1: good practice

It is considered good practice to have an agreement with another individual or firm to take effect in the event of the incapacity or death of a sole practitioner. By ensuring that you have an alternate agreement in place and providing your immediate family and senior staff with access to the agreement with your alternate, you will help avoid uncertainties that could create further concern and distress at a difficult time. The alternate does not need to be a sole practitioner; a multi principal audit firm may have greater capacity to take on the role of alternate.

Scenario 2: audit regulations (Republic of Ireland) (effective 6 April 2023, Regulation 2.02)

Effective from 6 April 2023 all sole practitioners who are registered for audit in the Republic of Ireland are required to have a formal arrangement in place with an alternate who is a registered auditor, which take effect in the event of the incapacity or death of the sole practitioner This is an eligibility requirement for audit registration and failure and comply may result in regulatory action. As stated above, the definition of a sole practice in the Audit Regulations also includes a corporate practice which has a single director.

The role of the alternate is to act as a medium for communication between clients, staff, Institute and so on, in the event of death or incapacity of the principal. The alternate does not necessarily have to be prepared to ‘take over’ the sole practitioner’s audits (and in fact cannot take over without proper appointment as auditor by clients). At a minimum, the alternate should undertake to provide information to the sole practitioner’s audit clients to facilitate the appointment of a new auditor by any clients in relation to whom audit work falls due during a period of incapacity. Depending on the terms of the alternate agreement, the alternate registered auditor may seek to be appointed as auditor for audit clients of the incapacitated or deceased auditor. The alternate registered auditor is also expected to be a point of contact for the Institute in relation to regulatory matters pertinent to the audit practice of the incapacitated or deceased sole practitioner auditor.

It is necessary for the appointed alternate to be registered auditor and retain audit registration as long as the alternate arrangements are in place. The Institute’s Audit Regulations require a sole practitioner audit firm to confirm to the Institute that alternate arrangements have been put in place. This will need to be declared on your firm’s annual return. If changes occur regarding the alternate registered auditor, the sole practitioner audit firm is required to notify the Institute within 10 business days of the change taking effect.

See further guidance in the FAQ's published by the Professional Standards Department here. 

Scenario 3: Public Practice Regulation Clients’ money (chapter 9 Regulation 9.5)

A sole practitioner who holds clients’ money is required to notify the Institute of their alternate arrangements. In the event that a sole practitioner is incapacitated, it is vital that an alternate has been appointed to provide a mechanism for clients to access their money. Such arrangements must have been made before the member accepts clients’ money. The Institute must be notified of these arrangements either prior to or immediately following the first receipt of clients’ money. Clients should also be made aware of the arrangements. Such an arrangement could be made with another firm. This need not necessarily be another chartered accountant, or indeed an accountant. However, in selecting an alternate, the member should be satisfied that the alternate is subject to similar clients’ money requirements and has the experience, integrity and understanding of what is required to take on this responsibility.

Scenario 4: Public Practice Regulations Insolvency (chapter 6 Regulation 6.29)

Any sole practitioner who holds an insolvency practising certificate must ensure they have adequate arrangements in place with another individual acceptable to the committee to be effected in the event of the incapacity or death of the insolvency practising certificate holder. The insolvency practising certificate holder must inform the committee of these arrangements in writing before or immediately following receipt of his or her insolvency practising certificate and inform the committee immediately following any change or cancellation of the arrangements.

What an alternate is required to do and matters to be considered in preparation of a formal agreement

The role of the alternate can vary from case to case depending on the wishes of the practitioner. It is important that the role and obligations of the appointed alternate are clearly set out in the agreement between the sole practitioner and the alternate and accepted by the alternate. Whilst some agreements can be verbal, in general you are advised to put the agreement in writing, and if necessary, seek legal advice in relation to the alternate agreement.

The following matters should be considered in the preparation of the formal alternate agreement. The Professional Standards Department provides some guidance in relation to matters which could be addressed in a formal agreement:

• The nature of the circumstances in which the alternate’s responsibilities would commence; and set out any relevant decision-makers in this regard (for example, sole practitioner’s family, solicitor, estate executors).

• The purpose of the alternate agreement and the extent (and limits) of the responsibilities which the alternate will be expected to undertake in the event of the death or incapacity of the sole practitioner. In the case of audits, for example, is the alternate expected to seek to be appointed as auditor, in all cases, in the case of urgent audits, or not at all?

• The powers which the alternate would have in relation to the sole practice in the event of the sole practitioner’s incapacity or death. Examples may include:

• Access to audit and/or other client information;
• Access to and/or operation of bank accounts;
• Decisions in respect of staff; and
• Other practice administration matters.

• The nature of the information which the sole practitioner should share with the alternate registered auditor at the commencement of the alternate arrangements and update on a regular basis. Examples might include:

• Details of the sole practitioner’s solicitor, bankers and insurance providers;
• Information on how to gain access to relevant client files to which the alternate would require access.

• Any remuneration arrangements for the alternate.

• Provisions for the regular review, by the sole practitioner and the alternate, of the alternate agreement;

• Provisions for the regular review of the operation of the alternate arrangements during a period when the arrangements are active (i.e. during a period of incapacity of the sole practitioner or subsequent to the death of the sole practitioner) by the alternate and the relevant representative of the sole practitioner (e.g. family, solicitor, estate executor);

• Whether the parties to the agreement intend it to be binding, on a best-efforts basis, or an entirely voluntary basis;

• Arrangements for dealing with conflicts of interest;

• Professional Indemnity (PII) and other insurance arrangements. Do PII providers and other insurance providers need to be informed of these arrangements, at the time of the making of the agreement, and then on the commencement of activity as an alternate?

• Provisions for the termination of the agreement; and

• Confidentiality clauses.

It is important to keep in mind that if you do not have an alternate in place, there is a risk that your practice could go from a well ordered business to a disorganised fire sale which could leave your family, staff and clients in a vulnerable position. If you have the time and ability to do what is needed as an alternate when you are first asked, you should ensure that you continue to be in this position and keep in touch with the sole practitioner. If your position changes and you can no longer act as the alternate this should be communicated and the necessary steps taken to allow for this.

If the alternate steps in to run the practice for a period of time, then the clients and staff may develop trust and confidence in them, and for these reasons the alternate may be the best choice to take over the practice on a permanent basis. However, care needs to be taken to avoid conflicts of interest in this case. Firstly, the alternate should prioritise their responsibilities in the position of trust that they have taken on, and should remain open and objective, remembering that they may not necessarily be the best choice to run the practice in the long term. Naturally, the family or the estate of the deceased or incapacitated person should not be pressurised or unduly influenced to favour the alternate where the alternate has an interest in the outcome of decisions. They will need independent advice on the best way to dispose of the practice or otherwise deal with the succession. This may involve a capital payment or payments for the practice and other financial and practical terms, on which independent advice may need to be needed. The alternate should avoid the conflict of interest of advising on a disposal where they are the proposed purchaser or have any other material interest. Full communication and transparency of all these matters is essential.

Practical example of the work of alternates

The Practice Consulting Team has advised and assisted in various situations where an alternate agreement has or has not been in place on the sudden passing of a member in sole practice. We have given whatever advice and assistance that we could, but we have also been deeply impressed by the commitment and generosity of alternates in these situations. An example is where a member in practice died suddenly, during the busy tax deadline period. The Institute had been supplied with the name of the alternate whom we were able to contact. A non-binding alternate agreement was in place. Notwithstanding the pressures in his own firm the alternate stepped in and assisted with the smooth running of the practice during the tax season. As the alternate was employed in a busy practice, he was conflicted in some aspects of the role, but he was able to help identify another firm to assist with certain aspects of the assignment and ultimately with the disposal of the practice. The preceding example, the details of which have been slightly changed to protect confidentiality, is typical of the commitment that we witness of members stepping up to help at these very difficult times.

Conclusion

In summary, if you are a sole practitioner or are the sole director of a corporate practice and do not have an alternate in place, maybe it is time to start thinking about this issue. You may already have an obligation to do this. If you put an arrangement in place, you should ensure that as well as notifying the Institute of the arrangement, steps should be taken to ensure that close family, friends know that the alternate agreement exists (a personal introduction to the alternate maybe useful), the details of these agreements, and whom to contact in this regard in the event of your incapacity or death. The Institute and the Practice Consulting team will continue to assist practitioners if they require advice in respect of alternates or their duties.