Two weeks ago, we discussed the issue of conflict of interest. We stated that 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 the official because of the possibility of a clash between the official’s self-interest and his or her professional or public 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. 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.
We then proceeded to consider conflict of interest from an accountant’s perspective, particularly as it relates to rendering audit services. We noted that the bar is significantly higher compared with other professions since independence from those whose work the auditor has to evaluate is the cornerstone, indeed the foundation pillar, of the auditing profession. A leading authority in the United Kingdom in the 1980s, Emile Woolf once wrote that the concept of an audit and concept of independence are the twin sides of the same coin and that a dependent auditor has lost his/her raison d’être and is a contradiction in terms.
The Institute of Internal Auditors considers that competing interests can make it difficult to fulfill the internal auditor’s duties impartially and could impair the individual’s ability to perform his or her duties and responsibilities objectively. The American Institute of Certified Public Accountants (AICPA) asserts that certain professional engagements, such as audits, reviews, and other attest services, require independence, and that independence impairments cannot be eliminated by disclosure and consent.
The ACCA Code of Ethics and Conduct considers conflict of interest and ethics to be inter-related. Ethics is concerned with what society considers to be right or wrong, and therefore relates to standards of behaviour. Objectivity has been identified as a key ethical principle, and members should not accept engagements in which conflicts arise, even if there is a possibility of such conflicts arising. Where threats relating to conflict of interest 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.
Today, we continue our discussion of conflict of interest.
Types of conflict of interest
The main types of conflict of interest relate to self-dealing, outside employment, nepotism, and acceptance of gifts. Self-dealing involves an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official. The official is on both sides of the ‘deal’. Outside employment can result in a conflict of interest where the interests in one job contradict the other.
Nepotism is involved where family interests, in which a spouse, child or other close relative is employed, or where goods or services are purchased from such relative or a firm controlled by a relative. The receipt of gifts, whether monetary or otherwise, is another form of conflict of interest since it has the potential of influencing decisions in favour of the giver. Depending on the value involved, the acceptance of gifts is a form of bribery and hence an act of corruption. A related issue is the use of government or corporate property or assets for personal use. Such use, if unauthorized, can also be viewed as an act of corruption.
According to the ACCA Code of Ethics, where gifts or other forms of hospitality are offered that a reasonable or informed third party, weighing all the specific facts and circumstances, would consider trivial and inconsequential, a professional accountant in public practice may conclude that the offer is made in the normal course of business without the specific intent to influence decision-making or to obtain information. In such cases, the professional accountant in public practice may generally conclude that any threat to compliance with the fundamental principles (integrity, objectivity, confidentiality and competence) is at an acceptable level. Where the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in public practice shall not accept such an offer.
Threats relating to conflict of interest
The main categories of threats are self-interest, self-review, advocacy, familiarity and intimidation. A self-interest threat occurs where financial or other interest will inappropriately influence the professional accountant’s judgment or behaviour. A self-review threat takes place where the accountant evaluates the results of a previous decision he or she has made or a service he or he has performed.
An advocacy threat occurs where the accountant promotes a client’s or employer’s position to the point where his or her objectivity is compromised. A familiarity threat takes place where, due to a long or close relationship with a client or employer, an accountant becomes too sympathetic to their interests or too accepting of their work. An intimidation threat exists where the accountant is deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over him or her.
Ways to mitigate conflicts of interest
There are five main ways of mitigating conflicts of interest: removal; disclosure; recusal; third party evaluation; and adherence of codes of ethics. The best way to handle conflicts of interest, however, is to avoid them entirely. Wikipedia gives the example of someone elected to political office who owns corporate stocks and is a member of several corporate boards. He or she may consider disposing of his/her stocks and resign from the boards.
Politicians and high ranking public officials are usually required to disclose annually financial information such as stocks, debts, and corporate positions held, typically. In Guyana, the Integrity Commission was established in 1997 for the purpose of securing the integrity of persons in public life. More specifically, the Commission is responsible for monitoring and reviewing annual declarations of assets and liabilities of politicians and senior government functionaries and the promulgation of a code of ethics to which they are required to adhere. However, the Commission’s work has been stymied for several years now by the failure to appoint members of the Commission. That apart, certain professionals are required either by rules relating to their professions or by statute to disclose actual or potential conflicts of interest. In some cases, failure to fully do so constitutes a crime.
Recusal involves the abstinence from decisions where a conflict of interest exists. Judges and magistrates recuse themselves all the time. Consider the board of a state agency is about to hire a consulting firm to undertake an assignment, and the firm being considered has a partner who is a close relative of a member of the board. One would expect the board member to recuse himself from not only any discussion on the matter but also participation in any way in the decision to select the firm.
Third party evaluation is necessary in situations where a need exists to ensure that a transaction being undertaken is an arm’s length one, particularly with regard to setting a price. For example, an entity that leases a property that is owned by its Chief Executive Officer may well consider it advisable to have an independent evaluation so that a fair price can be obtained for leasing the asset. In the public sector, since the rules relating to conflict of interest are more demanding and public accountability far more rigorous than that which prevails in the private sector, it would be desirable to procure the services elsewhere normally through a competitive bidding process. Another example is where a major shareholder of a publicly held corporate entity decides to buy out the minority interest thereby making the entity private. It would be improper, indeed illegal, for the shareholder to state a price to be paid and for the board, which he/she controls, to approve of the price.
Generally, conflicts of interest should be eliminated. However, in certain cases this can create hardships. It is mainly for this reason that many organizations and professional associations have found it necessary to develop codes of ethics for the guidance of employees and members. Adherence to codes of ethics helps minimize problems with conflicts of interest because they spell out the extent to which such conflicts should be avoided and what the parties should do where such conflicts are permitted.
Next week, we will discuss the major accounting scandals involving Enron and WorldCom. These were the result of human failings to uphold high ethical standards. In both cases, commercial interest took precedence over allegiance to professional integrity. The United States Government has since passed the Sarbanes-Oxley Act of 2002 to restore the reliability of the public company audit process by, among others, prohibiting auditors from rendering consulting services for the company they are also auditing. In Guyana, this problem was recognized as far back as 1993 in relation to the audits of State-owned/controlled entities. As a result, the Financial Administration and Audit (Amendment) Act was passed precluding Chartered Accountants in public practice from rendering accounting, taxation or consulting services for entities for which they were appointed auditors.
