As a registered greenhouse and energy auditor, it's important you understand conflict of interest.
Use resources published by reputable sources like the Accounting Professional and Ethical Standards Board to help you understand. We also publish resources like our webinar on conflict of interest.
Legislation and standards
You must be familiar with legislation and standards related to conflict of interest, including:
- National Greenhouse and Energy Reporting Regulations 2008 (Subdivisions 6.6.3-6.6.5)
- National Greenhouse and Energy Reporting (Audit) Determination 2009 (section 2.4)
- ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information
- ASQM 2 Engagement Quality Reviews
- ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information
- APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (APES 110)
- APES 320 Quality Control for Firms.
You must comply with the Regulations and Determination.
Section 2.5 of the Determination states that audit team leaders must make sure an audit is conducted and reported in accordance with the auditing standards.
What is a conflict of interest?
When there's a conflict of interest, a reasonable person who understands the situation might doubt your ability to make fair decisions during the audit.
Conflict of interest is defined in section 6.49 of the Regulations.
Example of conflict of interest
An audit team leader agrees to audit a registered corporation, but they used to work for the corporation 6 months ago.
In this case, the audit team leader’s previous employment creates a conflict of interest, which is not allowed under the Regulations.
The audit team leader would not be able to make objective or impartial decisions during the audit, or a reasonable person might not think they'd be able to.
The Regulations require audit team leaders to follow the Code of Conduct, which includes being objective during a Part 6 audit.
Conflict of interest and independence
Conflict of interest and independence are related but different concepts.
Auditors must be independent from the organisation they audit. To be independent, you must handle conflict of interest issues appropriately. But being independent also includes other things, like auditor rotations.
To be independent, you need:
- independence of mind – a mindset that allows you to reach conclusions without being influenced by factors that compromise your professional judgement, allowing you to act with integrity, objectivity and professional scepticism
- independence in appearance – avoiding situations that might make others question your integrity, objectivity or professional scepticism.
To learn more about these ideas, read the Accounting Professional and Ethical Standards Board Independence Guide.
The guide also lists 5 fundamental ethical principles all auditors must follow:
- Integrity – be straightforward and honest in all professional and business relationships.
- Objectivity – don’t compromise professional or business judgements because of bias, conflict of interest or undue influence of others.
- Professional competence and due care – stay up to date with the knowledge, skills and standards you need to provide competent professional services.
- Confidentiality – respect the confidentiality of information you get through professional and business relationships.
- Professional behaviour – comply with relevant laws and regulations and avoid conduct that might discredit the profession.
A conflict of interest threatens these principles, particularly objectivity.
The importance of conflict of interest
Ensuring conflict of interest issues don’t impact an audit is fundamental to the audit process.
If you don’t handle a conflict of interest appropriately, your objectivity and impartial judgement may be questioned. This undermines the credibility of the audit.
Dealing with these issues properly isn’t easy. There are many circumstances that can prevent you from resolving a conflict of interest issue properly. You must deal with:
- pressure to meet client expectations
- the need to complete work within deadlines
- pressure to hit revenue targets for your firm
- a desire to justify your decisions by thinking you know better than others
- the temptation to downplay the impact of your decisions and think no one will find out or be hurt
- tendency to convince yourself that the matter is not important or everyone else does it.
You may also be afraid of the consequences of addressing conflict of interest issues, like losing a client or disappointing others. For example, if you were to disclose that you had a financial interest or personal relationship with an audit client.
Framework for dealing with conflict of interest
The audit standards set out a conceptual framework for dealing with conflict of interest issues. This framework involves 3 steps:
- Identify any conflict of interest issues.
- Evaluate the issues.
- Address the issues.
When using this framework, the audit standards require you to:
- exercise professional judgement
- remain alert for new information and to changes in facts and circumstances
- use the reasonable and informed third-party test.
The first step is to identify any facts and circumstances that could be a conflict of interest. These could include:
- professional activities
- interests
- relationships.
The framework focuses on 5 threats to an auditor’s independence: self-interest, self-review, familiarity, intimidation and advocacy.
If you don't deal with these threats, it represents a competing interest or loyalty — a conflict of interest.
To help you identify these issues, seek advice from someone who isn’t involved in the audit. This will help you identify issues you may have missed.
Self-interest
When there are financial or other interests that may influence your judgement or behaviour.
Examples of this threat include:
- You or your company depend heavily on the fees paid by the audited body.
- Audit team members have a financial interest in the audited body.
This is the most common threat.
Self-review
When there's a risk that you or someone in your company might not properly check or review previous decisions or actions. You then use these unchecked results to make judgements during the audit.
Examples of this threat include:
- Performing non-audit services, including consulting, for the audited body.
- Using external experts to support the audit where the experts have provided consulting services to the audited body.
- Advising corrections to the audited body.
Familiarity
When you compromise your objectivity by being too sympathetic to the interests of an audited body. You could also be too accepting of their work. This could happen because of a long or close relationship with the audited body or another relevant person.
Examples of this threat include:
- An audit team leader uses the same peer reviewer for all or most audits.
- An audit team member has a close relationship with an employee of the audited body.
- Lacking timely confirmation of independence by audit team members.
- Not identifying all relevant parties when considering conflict of interest.
Intimidation
When you’re deterred from acting objectively because of actual or perceived pressures.
An example of this threat is when an audited body puts excessive pressure on the audit team to complete the audit by a certain date.
Advocacy
When your objectivity is compromised because you promote an audited body’s position.
An example of this threat is when an audited body asks you to act as a referee for them in a business proposal.
The second step is to evaluate whether the threat of a conflict of interest issue is at an ‘acceptable level’. This is based on the reasonable and informed third-party test.
Use the test to determine if you comply with the 5 fundamental ethical principles.
The reasonable and informed third-party test
This test involves you, as the auditor, evaluating if a reasonable and informed third party would come to the same audit conclusions you did.
The reasonable and informed third party doesn't have to be an auditor. But they should have the necessary knowledge and experience to understand and evaluate your conclusions in an unbiased way.
Examples of reasonable and informed third parties may include:
- investors
- board members
- senior members in business or public practice
- our employees.
Factors relevant for evaluating issues
Consider qualitative and quantitative factors when evaluating conflict of interest issues. You should also consider the combined effect of multiple issues.
If you identify multiple issues, you should consider them as a group, even if the issues are small on their own.
For more examples of factors, refer to APES 110.
If you think the conflict of interest issue is not at an acceptable level, the next step is to address it. You should eliminate or reduce the issue to an acceptable level by:
- eliminating the circumstances that are causing the issue, including interests or relationships
- applying safeguards to reduce the issue to an acceptable level where possible.
If you can’t eliminate the circumstances or apply safeguards, you may need to decline or end the audit.
APES 110 defines safeguards as actions, individually or in combination, an auditor can take that effectively reduce issues to an acceptable level.
You must decide whether your actions eliminate or reduce the issues to an acceptable level. You should review significant judgements and conclusions and use the reasonable and informed third-party test.
Evidence to keep on an audit file
You need to record how you dealt with a conflict of interest issue. Record this using an audit file.
The audit file should include documentation of important decisions and judgements made during an audit. Decisions related to conflict of interest often require significant judgement.
The audit file must include evidence of:
- why the audit started or continued despite a conflict of interest, including firm-level considerations
- declaration of independence from everyone involved in the audit, including team members, peer reviewers and external experts
- timely sharing of these declarations with the audited body
- how you identified, evaluated and addressed conflict of interest issues.
Evidence should be signed and dated at the appropriate time.
Principles for dealing with conflicts of interest
There are 6 key principles for auditors in dealing with conflicts of interest:
- You must be able to identify threats to your independence.
- A conflict of interest can be actual or perceived.
- A conflict of interest can concern anybody involved with conducting an audit. This includes team members, peer reviewers and external experts.
- Know and follow the legislation, audit standards, agency policy and guidance on conflicts of interest.
- If you have any concerns or doubts, contact us. These issues are complicated and involve many subtleties so we can't provide general rules beyond those in the legislation and standards – every case is unique.
- You must use your professional judgement to identify and resolve conflict of interest issues. You're accountable for your actions in dealing with these issues and the following consequences.
How to prepare for a conflict of interest
There are a number of actions you need to undertake to ensure you're prepared to deal with conflict of interest issues:
- Make sure you know the requirements in the legislation and audit standards.
- Review your firm’s quality control system and make sure it continues to meet requirements.
- Assess whether the processes you use for meeting the requirements are appropriate.
- Think about your audit team members, external experts and peer reviewers — how well do they understand the requirements?
- Consider how effectively you monitor the way you deal with conflict of interest issues.
- Read our guidance.
If you have any potential conflict of interest issues, contact us to discuss them. You're ultimately responsible for dealing with these issues and will be accountable for them.
If you can't resolve the conflict of interest situation, the NGER Regulations require audit team leaders to either:
- remove themselves from the audit
- get an exemption from us.
If the issue concerns an audit team member and it can't be resolved, the team member must either:
- not take part in the audit
- get an exemption from us.