Q

Provide examples of where conflict of interest situations could emerge

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Question - According to the Australian Securities and Investment Commission (ASIC), the auditor has a responsibility to be both aware of and implement appropriate responses to avoid conflicts of interest.

With reference to the Code of Ethics for Professional Accountants, provide examples of where conflict of interest situations could emerge and explain how this affects auditor independence.

Answer -

Conflicts of interest situation can arise where the auditor has a familiar relationship with the company that is being audited. This familiar relationship can result in the auditor not acting independently and objectively when doing the audit of that company.

Such a situation can also arise where the company that is being audited has Intimidated the auditor. Such intimidation can include the message that if the audit opinion is not favourable, the audit firm will not get future auditing assignment from the company.

Conflict of interest situation can arise where the auditor has become an Advocate of the company that is being audited. Such a situation also arises when the audit firm also gets significant amount of revenues from providing non-audit services to the company that it is auditing. Examples of non-audit services include consulting etc. In such a situation the auditor may hesitate in issuing an adverse audit opinion because of the fear that the company may cancel the contract for non-audit services if it gives adverse audit opinion.

Self-review is also a situation where conflict of interest can arise. Self-review means a member of the audit team that has done the audit reviewing its own work. For examplea member of the same team that is providing accounting services to the company that is being audited is also auditing the company later on.  It needs to be mentioned here that audit firms also provide non-audit services to companies such as preparation of accounts etc.


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