During the acceptance phase of all engagements, we may identify that a potential conflict of interest exists. When this happens, we evaluate the significance of the relationship or relevant interest and the degree of its connection with the nature of the professional service provided.

Definition

AICPA Code of Professional Conduct defines the conflict of interest as follows:

“.02 A conflict of interest creates adverse interest and self-interest threats to the member’s compliance with the "Integrity and Objectivity Rule" [1.100.001]. For example, threats may be created when a. the member or the member’s firm provides a professional service related to a particular matter involving two or more clients whose interests with respect to that matter are in conflict, or b. the interests of the member or the member’s firm with respect to a particular matter and the interests of the client for whom the member or the member’s firm provides a professional service related to that matter are in conflict.”

Examples

AICPA Code of Professional Conduct includes the following examples of situations where conflicts of interest may exist:

“.04 The following are examples of situations in which conflicts of interest may arise: a. Providing corporate finance services to a client seeking to acquire an audit client of the firm, when the firm has obtained confidential information during the course of the audit that may be relevant to the transaction b. Advising two clients at the same time who are competing to acquire the same company when the advice might be relevant to the parties’ competitive positions c. Providing services to both a vendor and a purchaser who are clients of the firm in relation to the same transaction d. Preparing valuations of assets for two clients who are in an adversarial position with respect to the same assets e. Representing two clients at the same time regarding the same matter who are in a legal dispute with each other, such as during divorce proceedings or the dissolution of a partnership f. Providing a report for a licensor on royalties due under a license agreement while at the same time advising the licensee of the correctness of the amounts payable under the same license agreement g. Advising a client to invest in a business in which, for example, the immediate family member of the member has a financial interest in the business h. Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a competitor of the client i. Advising a client on the acquisition of a business which the firm is also interested in acquiring j. Advising a client on the purchase of a product or service while having a royalty or commission agreement with one of the potential vendors of that product or service k. Providing forensic investigation services to a client for the purpose of evaluating or supporting contemplated litigation against another client of the firm l. Providing tax or personal financial planning services for several members of a family whom the member knows to have opposing interests m. Referring a personal financial planning or tax client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement n. A client asks the member to provide tax or personal financial planning services to its executives, and the services could result in the member recommending to the executives actions that may be adverse to the company. [Prior reference: paragraphs .198–.199 of ET section 191] o. A member serves as a director or an officer of a local United Way or similar organization that operates as a federated fund-raising organization from which local charities receive funds. Some of those charities are clients of the member’s firm. [Prior reference: paragraphs .186–.187 of ET section 191] p. A member who is an officer, a director, or a shareholder of an entity has significant influence over the entity, and that entity has a loan to or from a client of the firm. [Prior reference: paragraphs .220–.221 of ET section 191]

Assurance Practice Process

When a conflict of interest is identified with an engagement where we provide positive (audit) or negative (review) assurance:

• We must carefully evaluate the level of risk and
• Based on this assessment, we may either:
  • decline the engagement, or
  • identify and implement safeguards that reduce the threat to an acceptable level.

Other Practice Process

When a conflict of interest is identified with an engagement where we do not provide an assurance, the firm should follow the below steps:

1. Identify whether the conflict and threat level are negligible based on our professional judgment.
2. If the conflict and threat level is other than clearly negligible, we further identify the safeguards necessary to reduce the threat to an acceptable level.
3. Disclose the information about existing conflict of interest to the client, along with the information about safeguards we are implementing to address the risks.
4. If the client consents to proceed with the engagement despite the conflict of interest, we may accept the engagement, provided no other issues or concerns are preventing us from it.
5. If the client refuses to provide consent after being notified of the conflict of interests, we must decline the engagement and consider terminating the relationship with the client.