A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise you company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.
What is a conflict of interest?
According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client 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 or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:
- Hiring an external auditor,
- Upgrading the level of assurance from a compilation or review to an audit, and
- Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.
Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.
For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.
Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.
How can auditors prevent potential conflicts?
AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:
- Seek guidance from legal counsel or a professional body on the best path forward,
- Disclose the conflict and secure consent from all parties to proceed,
- Segregate responsibilities within the firm to avoid the potential for conflict, and/or
- Decline or withdraw from the engagement that’s the source of the conflict.
Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.
For more information
Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it.
How Can We Help?
Call or email our team today
KSDT CPA is ready to navigate the process with you. Fill out the form below and our team will contact you shortly.
Inflation Reduction Act provisions of interest to small businesses
The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions…
Year-end tax planning ideas for your small business
Now that Labor Day has passed, it’s a good time to think about making moves that may…
Is your business required to report employee health coverage?
As you’re aware, certain employers are required to report information related to their employees’ health coverage. Does…