For many businesses, year-end puts the spotlight on the annual audit. While conflicts of interest are a year-round concern, they often receive greater scrutiny during the audit process. Taking a proactive approach to identifying and addressing potential conflicts can help avoid disruptions, protect auditor independence and support a smoother audit experience.

Spotting Conflicts of Interest 

According to the American Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” 

Companies should be on the lookout for potential conflicts when:

• Hiring an external auditor.
• Upgrading the level of assurance from a compilation or review to an audit.
• Using the auditor for non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny. 

For example, if an auditor recommends an external payroll provider’s software to an audit client and receives a commission from the provider, a conflict of interest likely exists. Why? While the third-party provider may suit the company’s needs, the payment of a commission raises concerns about the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits. 

Now consider a situation in which a company approaches an audit firm to assist in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards. 

Beyond ethical concerns, unresolved conflicts can call auditor independence into question, potentially creating issues during the audit process. That's why companies should evaluate potential conflicts throughout the year rather than waiting until audit season to uncover them.

Addressing Conflicts

AICPA standards require audit firms to avoid conflicts of interest. If a potential conflict is unearthed, audit firms have the following options:

• Review guidance from a professional body, such as the AICPA, to determine the appropriate course of action
• Segregate responsibilities within the firm to avoid the potential for conflict.
• Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has implemented to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor for conflicts regularly because circumstances may change over time, for example, due to employee turnover or M&A activity.

Protecting Your Audit Integrity

If left unchecked, conflicts of interest can compromise the credibility of your financial statements and expose your company to unnecessary risks. Identifying and addressing potential conflicts before audit fieldwork begins can help preserve auditor independence and reduce the risk of complications during the engagement. If you suspect a conflict exists, our audit pros are here to discuss the matter and determine the most appropriate way to address it.