The issue of conflict of interest has been in the news over the last few weeks, especially in the light of the disclosure by one of the media houses that the Alliance for Change (AFC) Chairman is also the Company Secretary of the Amaila Falls Hydro Inc., the company that was set up to manage the construction and operations of the Hydro Project. The AFC had initially voted against: (a) an amendment to the Hydro Electric Act to protect the surrounding area in which the project is located; and (b) a motion to lift the ceiling for the Government guarantee of loans to public entities to facilitate the proposed Power Purchase Agreement between the AFH Inc. and GPL for the supply of electricity. It had cited, among others, the high cost of the project arising out of the mix of financing as well as inadequate information to enable it to make an informed decision.
Some three weeks later, the two draft pieces of legislation were re-tabled in the National Assembly. This time,
the AFC decided to vote in favour of them. The AFC’s revised position was that: (a) it wanted to give the project a “lifeline”; its support was “conditional”; (b) it still had certain concerns about the project but did not have the requisite expertise to properly evaluate it; and (c) it was relying on the Inter-American Development Bank’s due diligence to decide finally whether or not to support the project. The AFC’s revised position on the Amaila Falls Project and the disclosure of the Chairman’s involvement in AFH Inc., have fuelled a renewed debate on the issue of conflict of interest.
What is conflict of interest?
A conflict of interest occurs in a situation where a public official’s decisions are influenced by his or her personal interest. It has the potential to undermine the impartiality and objectivity of a person because of the possibility of a clash between the person’s self-interest and his or her professional or public interest. Where an individual or organization is involved in multiple interests, one could influence the action of another, hence the potential for a conflict of interest.
A conflict of interest exists whether or not that influence actually takes place. Once there is a reasonable belief that there is a risk that decisions may be unduly influenced by secondary interests, there is a conflict of interest. It can also exist even if there are no improper acts since differing roles are likely to provide an incentive for improper acts in certain situations. Most professions have codes of ethics or conduct dealing with conflicts of interest, and a member who has been involved in a conflict of interest may be subject to disciplinary proceedings before the body that granted him or her permission to practice the profession.
In the legal profession, the duty of loyalty owed to a client prohibits an attorney from representing another party with interests adverse to those of a current client. We have seen situations where judges and magistrates recuse themselves from presiding over cases where, because of an association with the plaintiff or the defendant, they may be placed in a difficult situation to maintain their impartiality.
Conflict of interest and the IIA
According to the Institute of Internal Auditors (IIA), internal auditors must have an impartial, unbiased attitude and avoid any conflict of interest. The IIA defines a conflict of interest as a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially.
A conflict of interest exists even if no unethical or improper act results. It can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his or her duties and responsibilities objectively. As such, internal auditors must not participate in any activity or relationship that may impair or is presumed to impair their unbiased assessment. This participation includes those activities and relationships that may be in conflict with the interests of the organization. Impairment to organizational independence and individual objectivity may include, but is not limited to, personal conflict of interest, scope limitation, restrictions on access to records, personnel and properties, and resource limitations, such as funding.
The IIA Code of Ethics lists four basic principles of professional ethics. These are integrity, objectivity, confidentiality and competence. Objectivity is perhaps the most relevant principle as it relates to conflicts of interest. It states that internal auditors exhibit the highest level of professional objectivity in gathering, evaluating and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.
Conflict of interest and the AICPA
The American Institute of Certified Public Accountants (AICPA) considers that in the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
A conflict of interest may occur if a member performs a professional service for a client or employer, and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client, employer or other appropriate parties as impairing the member’s objectivity. If the
member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate authorities, the rule shall not operate to prohibit the performance of the professional service.
Certain professional engagements, such as audits, reviews, and other attest services, require independence. However, independence impairments, their interpretations, and rulings cannot be eliminated by such disclosure and consent.
The ACCA Code of Ethics and Conduct
Conflict of interest and ethics are inter-related. According to the Association of Chartered Certified Accountants (ACCA), ethics is concerned with what society considers to be right or wrong. It therefore relates to standards of behaviour. The ACCA gave the example of the expense scandal in the UK regarding claims for reimbursement by politicians. One politician responded by stating that she had done nothing illegal. However, the general public may still regard legitimate expense claims as inappropriate and therefore unethical.
If accountants behave unethically, their clients will lose confidence in their services, and society in general will no longer trust them or feel that they act in the public interest. Objectivity has been identified as a key ethical principle. Members of the profession should not allow bias, conflict of interest or undue influence of others to override professional or business judgments. Members should therefore not accept engagements in which conflicts arise, even if there is a possibility of such conflicts arising.
When a professional accountant identifies threats to compliance with the fundamental principles – integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour – and, based on an evaluation of those threats, considers that they are not at an acceptable level, he or she must determine whether appropriate safeguards are available and can be applied to eliminate the threats or reduce them to an acceptable level. In making that determination, the accountant must exercise professional judgment and take into account whether a reasonable and uninformed third party, weighing all the specific facts and circumstances available to the accountant at the time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of the safeguards, such that compliance with the fundamental principles is not compromised (Rule 100.7).
The main categories of threats are:
Self-interest threat: Financial or other interest will inappropriately influence the professional accountant’s judgment or behaviour;
Self-review threat: An accountant will not appropriately evaluate the results of a previous decision he or she has made or a service he or she has performed;
Advocacy threat: An accountant will promote a client’s or employer’s position to the point where his or her objectivity is compromised;
Familiarity threat: Due to a long or close relationship with a client or employer, an accountant will be too sympathetic to their interests or too accepting of their work; and
Intimidation threat: An accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.
Where the threats cannot be eliminated or reduced to an acceptable level, either because appropriate safeguards are not available or cannot be applied, the professional accountant must decline or discontinue the specific professional service involved or, where necessary, resign from the engagement or the employing organization.
A professional accountant may inadvertently violate a provision of the Code of Ethics and Conduct. Depending on the nature and significance of the matter, such an inadvertent violation may be deemed not to compromise compliance with the fundamental principles provided, once the violation is discovered, the violation is corrected promptly and the necessary safeguards are applied (Rule 100.10).
To be continued
