Conflicts of Interest PDF

This module looks at how to apply the conceptual framework when an AAT licensed member is faced with a conflict of interest when performing a professional service. This could be a conflict of interest between two clients, or between the member's interests and that of the client. A conflict of inter...

This module looks at how to apply the conceptual framework when an AAT licensed member is faced with a conflict of interest when performing a professional service. This could be a conflict of interest between two clients, or between the member's interests and that of the client. A conflict of interest creates a threat to the fundamental principle of objectivity and may create threats to the other fundamental principles. This module contains six questions based on two scenarios. You should answer these questions with reference to AAT's Code of Professional Ethics(opens in a new tab) specific guidance on conflicts of interest. Nisar is an AAT licenced member, and a partner at the firm of Unsworth LLP. They are a small firm of accountants which provide a range of professional services to its business clients. Unsworth LLP have recently provided a training course for all staff who are AAT members on AAT's Code of Professional Ethics including guidance for dealing with conflicts of interest. It's Wednesday 15 January. Yesterday Nisar received an email from Chris Calnan at CC IT Advisers LLP (CC). CC's major competitor, Ayres IT Advisers LLP, (Ayres) is one of Nisar's clients and Nisar provides strategic advice to Ayres in relation to all aspects of their business. Unsworth LLP has a highly regarded IT department that designs bespoke accountancy software for Unsworth’s internal use From: Chris Calnan Sent: Tuesday 14 January To: Nisar Cc: Subject: Kimbletown Hi Nisar, As you know we’ve always had great respect at CC IT Advisers LLP for the reputation of your firm and the accountancy software your IT department designs; my own firm is also highly regarded but doesn’t have experience of designing accountancy software. I’ve been made aware of an opportunity to tender for a contract that requires experience of designing accountancy software. I would therefore like to discuss with you the possibility of setting up a joint venture to tender for this contract. Please could you call me so that we can arrange a time to discuss this face to face? Regards, Chris Scenario 1 Top of page Conflicts of interest 17% complete 1 of 6 — Introduction Lesson content Scenario 1 Section 2 of 6 Nisar is an AAT licenced member, and a partner at the firm of Unsworth LLP. They are a small firm of accountants which provide a range of professional services to its business clients. Unsworth LLP have recently provided a training course for all staff who are AAT members on AAT's Code of Professional Ethics including guidance for dealing with conflicts of interest. It's Wednesday 15 January. Yesterday Nisar received an email from Chris Calnan at CC IT Advisers LLP (CC). CC's major competitor, Ayres IT Advisers LLP, (Ayres) is one of Nisar's clients and Nisar provides strategic advice to Ayres in relation to all aspects of their business. Unsworth LLP has a highly regarded IT department that designs bespoke accountancy software for Unsworth’s internal use. From: Chris Calnan Sent: Tuesday 14 January To: Nisar Cc: Subject: Kimbletown Hi Nisar, As you know we’ve always had great respect at CC IT Advisers LLP for the reputation of your firm and the accountancy software your IT department designs; my own firm is also highly regarded but doesn’t have experience of designing accountancy software. I’ve been made aware of an opportunity to tender for a contract that requires experience of designing accountancy software. I would therefore like to discuss with you the possibility of setting up a joint venture to tender for this contract. Please could you call me so that we can arrange a time to discuss this face to face? Regards, Chris This situation raises ethical issues for Nisar to which he’ll need to apply the specific guidance on how to apply the conceptual framework found in the AAT’s Code of Professional Ethics. AAT is committed to enhancing and upholding the highest ethical and professional standards, which is key to maintaining public confidence in the accountancy profession. The decisions we make in the everyday course of our professional lives can have real ethical implications. To help our members make the right choices and offer the highest levels of professional service at all times, our members are required to comply with AAT’s Code of Professional Ethics (PDF). Our Code of Professional Ethics is based on the IESBA Code of Ethics for Professional Accountants and sets out the five fundamental principles which all AAT members are required to adopt: integrity objectivity professional competence and due care confidentiality professional behaviour. Setting up a joint venture with CC, the major competitor of his client Ayres is a potential threat to Nisar’s fundamental principle of objectivity as Nisar provides strategic advice to Ayres. Nisar has a conflict of interest: he would find it difficult to balance the needs of Ayres with his desire to make a success of the joint venture which is directly competing with Ayres. Nisar will have a potential conflict of interest should he decide to go ahead with the joint venture with CC. Therefore, he must consider his position using the conceptual framework. Using professional judgement, Nisar must consider the potential threat to his compliance with the fundamental principles. If the conflict of interest becomes significant in any way then Nisar must implement safeguards to reduce the threat. Nisar and the partners at Unsworth LLP have decided to enter into the joint venture with CC IT Advisers LLP (CC). Nisar has concluded that the significance of the relationship with CC will be a threat to his objectivity in relation to his client Ayres Tax Advisers LLP (Ayres). What is the next step that Nisar should take? Asking for consent is the safeguard that Nisar should implement to reduce or eliminate the threat to his objectivity. Ayres may well withhold their consent, in which case Nisar has failed to reduce/eliminate the threat with the appropriate safeguard. At that point he must make a decision: either decline the joint venture with CC or resign from the relationship with his client, Ayres. When approaching Ayres, what other fundamental principle does Nisar need to be alert to? When addressing the conflict of interest with Ayres, Nisar must ensure the fundamental principle of confidentiality is maintained. Ayres may not be aware of the tender for the contract and this would be a breach of confidentiality if the information was shared while trying to address the conflict of interest. It's now Friday 31 January, and Nisar has just received two emails - one from Paddox Ltd and one from AMG Ltd. Both companies have been major clients of Unsworth LLP for accounting services for many years. They’ve also traded with each other during that time as Paddox Ltd supplies machinery to AMG Ltd. A month ago one of the machines supplied by Paddox Ltd suffered a major breakdown which has caused AMG Ltd to lose valuable contracts. Email 1 From: Andrew Meering (AMG Ltd) To: Nisar Cc: Subject: Need your help Hi Nisar, As you know, one of our machines suffered a major breakdown recently which was caused by a malfunction in a machine supplied by Paddox Ltd. We will need Unsworth LLP to represent our accounts department during legal negotiations about this matter. I hope that is acceptable? Regards, Andrew Meering Managing Director, AMG Ltd Email 2 From: Lina Paddox To: Nisar Cc: Subject: Assistance with legal matter Hello Nisar, One of our customers, AMG, is claiming it's our fault that one of their machines suffered a major breakdown. We believe the fault was caused by AMG's misuse of the machine in question. I will need Unsworth LLP to represent our accounts department during legal negotiations with them. I trust that is OK? Regards, Lina Paddox Managing Director (Paddox Ltd) Which two fundamental principles are potentially threatened? Acting as the representative of the accounts departments of two clients on opposite sides of a legal dispute is clearly a serious conflict of interest for Unsworth and therefore Nisar. Nisar’s objectivity is threatened because Unsworth will have to balance the needs of each client. There is also a threat to confidentiality. As the representative for AMG, Unsworth have access to confidential information about Paddox which they would not have access to if Paddox were not one of Unsworth's clients. The reverse is also true, if Unsworth were to represent Paddox they would have access to confidential information about AMG. Nisar and the partners at Unsworth LLP have decided that they would like to continue to act for both clients on this matter. Which primary safeguard should Nisar implement? Nisar’s first step must be to notify both parties that he would like Unsworth to act for both of them in this dispute. He should explain that there is a conflict of interests, disclose the nature of the conflict, and the safeguards that have been introduced. He should then obtain the consent of each party to act for both of them. Nisar's first steps should be to ensure that the engagement teams for AMG and Paddox are completely separate. There should be no team members who act for both parties. After that he should ensure that the teams are physically located in separate sections, that they adhere to codes of security and confidentiality and that they file data relating to each client securely and confidentially. Which of the following safeguards should be implemented next? Limiting access to client files, and separating confidential information is a safeguard that will help reduce the threat to an acceptable level. Although the safeguards should be regularly reviewed, the review shouldn’t be undertaken by Nisar. Instead, it should be by a senior individual not involved with the engagements. Provided the separate engagement teams are created, and all have policies and procedures to maintain confidentiality, it shouldn’t be necessary to recruit additional staff or find another accountant for one of the clients. If a conflict of interest arises, the specific guidance on applying the conceptual framework: Principles – Threats – Safeguards helps members in practice to assess the situation before they decide upon their actions. Every situation which presents a conflict of interest is different, and there are no set rules on how to deal with every situation. The actions to resolve each situation will be different. The following steps can help you to decide on how to act. Ask yourself: Does this situation represent a conflict of interest? Is there a conflict between my own interests and the client’s? Is there any conflict of interest between two of my clients? If the answer to either question is yes, is there any impact on my ethical principles of professional behaviour, confidentiality, integrity, professional competence and due care, and objectivity? If the answer is yes: use the Conceptual Framework for ethics to analyse which principles are threatened and what the threats are, then use AAT's guidance on conflicts of interest, together with your professional judgement and safeguards, to decide what to do next. The next step is usually to obtain consent from the client(s) in question. The final step does not have to be resignation in every case. Case study You have been the finance director of a clothing retailer for ten years. The company’s year end is 31 March, and you are finalising the year end accounts. You have recently been advised by the warehouse manager of a significant level of slow moving stock. The stock (or inventory) in question is now more than nine months old and would normally have been written down some months previously. The shareholders are trying to sell the company, and the managing director (the majority shareholder) has told you that it is not necessary to write down the stock in the year end accounts. You are sure that the managing director wants the financial statements to carry the highest possible stock valuation because they have found a prospective buyer. The managing director has indicated to you that, if the proposed deal is successful, all employees will keep their jobs and you will receive a pay increase. Questions As a professional accountant in business: (a) (b) (c) Which fundamental principles feature more prominently for safeguarding? What would be your key considerations in your approach to resolving the dilemma presented? What course of action would you take to resolve the dilemma? (a) Key fundamental principles Integrity: In the light of the information you have, you must ensure that you act honestly, and that you are open and straightforward towards those with whom you come into contact. Objectivity: Can you act without bias, despite the significant threats in the form of self interest and possible intimidation? Professional competence and due care: You must act diligently. Do you have sufficient information to be able to determine the appropriate value of the stock to be included in the accounts? Can you reference and correctly apply the relevant accounting standard and legislation relating to the valuation of stock? Professional behaviour: You are required to account for the stock in accordance with relevant accounting standards. Would any of the actions you are considering discredit the profession in the opinion of a reasonable and informed third party? (b) Considerations Identify relevant facts: Stock represents a large (if not the largest) portion of assets of manufacturing firms and, as such, makes up an important part of the balance sheet items. You are receiving conflicting information from the warehouse manager and the managing director. You are uncomfortable because the managing director is putting you under pressure to account for stock at a higher value than that with which you feel is appropriate. This, in your opinion, would result in misrepresenting information about the company in the financial statements, which is contrary to the fundamental principle of integrity. A self-interest threat to your objectivity arises from the financial benefit that you are likely to receive if the company is sold under the proposed deal. Because of the pressure exerted by the managing director you feel intimidated by the threat that you may lose out on a pay rise or even job security. You are concerned you will be deterred from acting objectively because of the managing director exercising undue influence over you. Also, due to the close relationship with the employing organisation, you feel sympathetic to their interests as they appear to be suggesting that the future employment of the other employees depends upon the proposed deal being successful and, therefore, upon the results shown by the financial statements.Identify affected parties: Key affected parties are you, the managing director (and the other shareholders) and the potential purchaser of the company. The employees of the company may also be affected, as it has been implied that their jobs are at risk if the proposed deal is unsuccessful. Other users of the financial statements, including creditors and other potential investors, may also be misled if the financial information is misrepresented. Who should be involved in the resolution: You should involve the warehouse manager, the managing director and, if necessary, those charged with governance, such as your fellow board members. It may also be necessary to involve the external auditors on the basis that the valuation of stock will involve a significant accounting estimate and judgement. (c) Possible course of action You cannot simply do what has been asked of you, because the principle of integrity requires a professional accountant not to be associated with information that they believe to be false or misleading. Relying on the potential buyer’s due diligence to identify the overvaluation is not appropriate. You are responsible for the honest presentation of the accounts, and you should not transfer that responsibility to either the buyer or the external auditors, although it may be appropriate to discuss with the latter. The first step is to ensure that you have sufficient information. This would include establishing the basis of valuation of the company’s stock, investigating the system for counting and evaluating stock, and discussing with the warehouse manager the reason why the stock is slow-moving. You may also need to discuss the realisable value with someone else, such as the sales director. Once you are sure of the facts, you should discuss the matter with the managing director. If, in your opinion, the managing director continues to insist on an inflated stock valuation being incorporated into the financial statements, you should consider how best to raise the issue with those charged with governance. Initially, you could suggest that both you and the managing director raise the matter with the other board members. If you feel it is appropriate to discuss the matter with anyone else within the company, you must bear in 10 Ethical Dilemmas Case Studies Professional Accountants in Business mind the need for appropriate confidentiality and be clear about your reasons for raising the matter. You should refer to the organisations speaking up or whistleblowing policies and procedures, if in place. Discussions with the managing director may be made easier by reference to the company’s own code of ethics or conduct, if it has one. If it does not, you should make the managing director aware of the ethical requirements of your professional body. You could suggest that the company engages an independent expert to value the stock. At each stage, you should consider the need to follow up meetings with email or other written correspondence to record your points of view. This would be particularly appropriate if you are of the opinion that the managing director or the board has not been sympathetic or effectively listening to your concerns. You might have to consider raising the issue externally, for example alerting the auditors to the existence of the slow-moving stock. You should consider discussing with a trusted advisor, e.g., a colleague or your professional body. If the situation remains unresolved, you may have to remove yourself from the conflict. The clearest way to disassociate yourself from misleading financial accounts would be to resign. However, this would only be an option to be exercised, as a last resort, in the most extreme circumstances. Resignation alone would not help to resolve the situation and is not a substitute for taking required actions. It would be advisable to take legal advice before considering resignation. You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the future.