Conflicts of interest and resolving ethical conflicts

A firm is the auditor of one cement company and is asked to audit its biggest rival. A partner is a non-executive director of two companies that trade with each other. A manager is asked to approve a big investment that would raise the value of his own shares.

Each of them faces a conflict of interest: a clash between what the professional should do and what is in somebody's interest, often his own. The Code gives a test for spotting these conflicts, safeguards for managing them, and a step-by-step process for settling an ethical dilemma that has no easy answer.

This topic covers conflicts of interest between a member and a client, between competing clients, and among those charged with governance, and then the process of resolving an ethical conflict. The previous topic was confidentiality and the next is non-compliance with laws and whistleblowing.

Key terms in plain English

Syllabus check

This topic is in syllabus area E, professional ethics and public interest (15% of marks). It covers:

• ethical conflicts and how they are resolved
• ethical conflicts in the governance of private and public entities
• actions to deal with ethical dilemmas

CAMA 2020 and conflicts of interest

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Conflicts between a member and a client

An ICAN member or firm should not accept or continue an engagement where there is a conflict of interest between the member or firm and the client. The test is whether a reasonable and informed third party would consider the conflict likely to affect the judgement of the member or firm.

Examples are a member competing directly with a client, and receiving a commission from a third party for introducing a client, such as an audit firm paid by a firm of brokers for introducing its audit clients. Safeguards include telling the client about the conflict or commission and obtaining the client's informed consent.

Conflicts between competing clients

A firm may act for two clients who compete with each other. The firm must keep the confidences of each, and the test is again whether a reasonable and informed third party would think the conflict likely to affect the firm's judgement. The right approach is a matter of judgement for the circumstances.

Where accepting or continuing the engagement would materially prejudice the interests of any client, the firm must not accept or continue it. In other cases possible safeguards are:

1. thinking carefully about whether to take a new client who competes directly with an existing one, and perhaps declining;
2. managing the clients carefully, for instance by using different staff on the two engagements;
3. full and frank disclosure of the potential conflict to both clients, with suitable steps to manage it;
4. procedures that prevent access to information, such as physical separation of teams and secure, confidential filing, called Chinese walls;
5. clear guidelines on security and confidentiality and the use of confidentiality agreements;
6. regular review of the safeguards; and
7. advising one or both clients to take additional independent advice.

Conflicts for those charged with governance

Public and private entities have people responsible for overseeing strategic direction and the financial reporting process and who are accountable for the organisation, called those charged with governance. An accountant in that role may face conflicts such as:

• acting in a governance position for more than one organisation, for example as a non-executive director, and learning confidential information from one that could be used to help or harm the other; and
• having a governance role that includes approving the company's investments, where the approval would raise the value of the accountant's own or an immediate family member's investment portfolio.

The safeguards are disclosure of the interest, withdrawal from the decision, and, where the conflict is permanent, giving up one of the roles.

Resolving an ethical conflict

An accountant may have to settle a conflict in applying the fundamental principles. The accountant should consider:

1. the relevant facts;
2. the ethical issues involved;
3. the fundamental principles related to the matter;
4. established internal procedures; and
5. alternative courses of action.

Having done that, the accountant decides on the course of action that is consistent with the principles, bearing in mind the consequences of each. If the matter is still unresolved, the accountant consults other appropriate persons within the firm or employing organisation. Where the conflict is with or within an organisation, the accountant also considers consulting those charged with governance, such as the board or the audit committee. The issues and discussions are documented.

When the conflict cannot be resolved

If a significant conflict cannot be resolved, the accountant may get professional advice from the appropriate committee of the Institute or from legal advisers, and so obtain guidance on the ethical issues without breaching confidentiality. If, after exhausting all the possibilities, the conflict is still unresolved, the accountant should, where possible, refuse to remain associated with the matter.

The accountant may decide to withdraw from the team or the specific assignment, or to resign from the engagement, the firm or the employing organisation.

Worked examples

1. The commission creates a conflict between the firm's interest and its duty to its clients.
2. A reasonable and informed third party may think it would affect the firm's advice.
3. Safeguards: tell the client and obtain informed consent, or decline the commission.

1. The firm could prejudice either client if their information crossed over.
2. It may decline; if it accepts, it uses separate teams, Chinese walls, confidentiality agreements and discloses to both clients.
3. If either client's interests would be materially prejudiced, it must not accept.

1. His own interest conflicts with his duty to the company.
2. He should disclose the interest and take no part in the decision.

1. List the facts, the ethical issues and the principles at risk (integrity, professional behaviour) and the internal procedures.
2. Consider the alternatives and their consequences.
3. Consult senior colleagues inside the firm, and then the board or audit committee.
4. If it is still unresolved, take advice from the Institute or lawyers, and if it persists, withdraw.

How to score full marks

• State the reasonable and informed third party test.
• Give the safeguards as a list: disclosure, consent, separation, review, declining.
• For dilemmas give the five considerations and then the escalation order.
• Close with the exit: refuse to stay associated or resign.

Common mistakes in the exam

• Assuming a conflict can be cured by disclosure alone.
• Telling one client's secrets to the other client.
• Skipping the internal consultation and going straight to a regulator.
• Not recording the discussions.

Quick revision

• Test: a reasonable and informed third party.
• Competing clients: separate teams, Chinese walls, disclosure, or decline.
• Governance conflicts: disclose and withdraw from the decision.
• Resolution: five considerations, consult, document, advice, withdraw.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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