Conflicts of interest for auditors

Standards and Specifications

Compliance with national and international regulations and standards regarding conflicts of interest is crucial. This includes:

● the Greenhouse Gas Reporting Specifications (the Specifications)

● the Greenhouse Gas Reporting (Audit) Codes of practice (the Codes of practice)

● ISQM 1

● ISQM 2

● ISAE 3000

● IESBA Code of Ethics for Professional Accountants,  and

● ISQC 1

According to Section 2.5 of the Codes of practice, audit team leaders are responsible for ensuring that audits are conducted and reported in compliance with auditing standards.

What is a conflict of interest?

In situations where a conflict of interest arises, an impartial observer may question your ability to make unbiased decisions during the audit. It is important to note that Section 6.49 of the Regulations provides a definition of conflict of interest.

Conflict of interest and independence are related but distinct concepts.

Auditors must maintain independence from the organizations they audit. Independence requires appropriate handling of conflict of interest issues, as well as other factors such as auditor rotations.

To ensure independence, the following are necessary:

● Independence of mind is a mindset that enables one to reach conclusions without being unduly influenced by factors that may compromise their professional judgment. This allows individuals to act with integrity, objectivity, and professional skepticism.

● Independence in appearance involves avoiding situations that might cause others to question one's integrity, objectivity, or professional skepticism.

The independence guide lists 5 fundamental ethical principles that auditors are expected to follow:

● Integrity requires auditors to be straightforward and honest in all professional and business relationships.

● Objectivity demands that auditors do not compromise their professional or business judgments due to bias, conflict of interest, or undue influence of others.

● These include integrity, objectivity, and professional competence and due care. Professional competence and due care require auditors to stay up to date with the knowledge, skills, and standards necessary to provide competent professional services.

● It is important to uphold the principles of confidentiality and 

● Professional behavior in all professional and business relationships.

This includes complying with relevant laws and regulations and avoiding any conduct that may discredit the profession.

It is important to be aware of potential conflicts of interest, as they can threaten the principles of objectivity.

Conflict of interest and independence

The Significance of Conflict of Interest

Ensuring that conflict of interest issues do not impact an audit is a crucial aspect of the audit process. It is important to address:

● Mishandling a conflict of interest can raise concerns about objectivity and impartial judgment, which can undermine the credibility of the audit.

● Properly addressing these issues can be challenging, as there are many circumstances that can hinder the resolution of a conflict of interest issue.

● The team is facing pressure to meet the expectations of our clients.

● There is a need to ensure timely completion of work and meet revenue targets for the firm.

● It may be perceived that there is a tendency to justify decisions based on the belief of having a better understanding than others.

● It is important to consider the potential impact of one's decisions, even if it may be tempting to downplay them and assume that no one will be affected.

● There may be a tendency to downplay the importance of the matter or assume that it is a common practice among others.

One may also feel concerned about the potential outcomes of addressing conflict of interest matters, such as the possibility of losing a client or causing disappointment. For instance, if one were to reveal a financial stake or personal connection with an audit client.

Framework for dealing with conflicts of interest

The audit standards set out a conceptual framework for dealing with conflicts of interest issues. This framework involves three steps:

(1) Identify any conflicts of interest issues

(2) Evaluate the issues

(3) Address the issues — eliminate or reduce to an acceptable level.

When using this framework, the audit standards require auditors to:

● exercise professional judgement

● remain alert for new information and to changes in facts and/or circumstances

● use the reasonable and informed third party test (discussed in section on evaluating conflicts of interest issues).

Evidence to keep on audit file

The importance of addressing conflicts of interest during an audit cannot be overstated. It is recommended that an audit file be maintained to document all important decisions and judgments made during the audit, including those related to conflicts of interest. Such decisions often require significant judgment.

The audit file should provide evidence of:

● Why the audit proceeded despite the conflict of interest, taking into account firm-level considerations.

● It is imperative that the auditors declare their independence from all parties involved in the audit, including team members, peer reviewers, and external experts.

● Furthermore, it is recommended that they ensure the timely sharing of these declarations with the audited body.

● In addition, the auditors should provide evidence of how they identified, evaluated, and addressed any conflict of interest issues.

This evidence should be signed and dated at the appropriate time.

Principles for Managing Conflicts of Interest

There are 6 key principles for auditors when dealing with conflicts of interest.

● It is important for auditors to be able to identify threats to their independence, whether actual or perceived.

● Conflicts of interest can concern anyone involved in conducting an audit, including team members, peer reviewers, and external experts.

● It is recommended to know and follow legislation, audit standards, agency policy, and guidance on conflicts of interest.

● If there are any concerns or doubts, please do not hesitate to contact us. These issues are complex and involve many subtleties, so it is difficult to provide general rules beyond those in the legislation and standards.

● As every case is unique, it is important to use professional judgment to identify and resolve conflicts of interest. It is your responsibility to be accountable for your actions in dealing with these issues and the resulting consequences.

Preparing for a Potential Conflict of Interest

To ensure that you are well-equipped to handle any potential conflict of interest issues, it is recommended that you take the following actions:

● Familiarize yourself with the criteria and audit requirements.

● Review your firm's quality control system to ensure that it meets all necessary requirements.

● Evaluate the appropriateness of the processes used to meet these requirements.

● Additionally, it is important to consider the understanding of these requirements by your audit team members, external experts, and peer reviewers.

● Please consider the effectiveness of your conflict of interest monitoring.

● We kindly suggest referring to our guidance.

If you believe there may be any conflicts of interest, we kindly request that you contact us to discuss them. It is important to address these issues in a timely manner, as you will be held accountable for them.

In the event that you are unable to resolve the conflict of interest situation, please note that

● the NGER Regulations require audit

● team leaders to either remove themselves from the audit or obtain an exemption from us.

If the matter pertains to an audit team member and cannot be resolved, the team member should either refrain from:

● participating in the audit or seek

● an exemption from our organization.