Handling Conflict of Interests in Engagements
Ankitha Krishnan, Auditor Internal Audit & Risk Management
While conducting engagements, it is imperative to avoid any kind of conflict of interest that can hamper our objectivity. A conflict of interest can arise in client engagements as well as any situations in which we enter into business relationships. Professional standards require us to take reasonable steps to identify circumstances that could pose a conflict of interest and apply appropriate safeguards to eliminate threats to reduce them to an acceptable level.
There are various types of conflicts of interest. Let us look at each one of them in detail.
- Transactional conflicts:- Potential conflicts that arise from client engagements involving the sale or purchase of a business and our relationships with the counterparties are termed as transactional conflicts. For example, if a firm is assisting a buyer in buy-side due diligence and the target /seller is also a client of the firm, a transactional conflict prevails.
- Relational conflicts:- Potential conflicts that arise from client engagements involving counterparties that have a pre-existing relationship are termed as relational conflicts. For example, in a joint venture between companies X and Y, Co. X approaches the advisory firm to provide tax advice related to JV. Later, Co. Y also approaches for similar service related to JV. Here, JV is the pre-existing relation between the counterparties.
- Advocacy conflicts:- Potential conflicts that arise from client engagements involving legal or other disputes and our relationships with the counterparties are termed as advocacy conflicts. For example, preparing valuations of assets for two parties who are in an adversarial position with respect to the assets.
- Personal conflicts:- Potential conflicts that arise from personal relationships and/or financial interests of the firm’s staff or partners with counterparties to the firm’s business relationship. For example, advising a client to invest in a business in which, the spouse of a member of the team has a financial interest.
- Competitive situations:- Potential conflicts that arise from our relationships with parties who are in competition with one another. For example, representing or advising two clients at the same time who are competing to acquire the same target where our advice might be relevant to both parties.
The first step in accepting any engagement is to look for potential conflict of interest among the parties involved. This can be achieved through a search in internal databases regarding prior engagements done, existing business relationships, etc. Once a conflict of interest has been identified, appropriate safeguards are to be taken. Examples of safeguards include:
- Using separate engagement teams to maintain confidentiality (ring-fencing).
- Using separate areas (geographical ring-fencing) in the office that act as a physical and electronic barrier to the passing of confidential information.
- Disclosure, acknowledgment, and consent from the parties involved in engagements.
In today’s globalized environment, we should identify and manage potential conflicts of interest as quickly and effectively as possible. By taking the above measures, we can be confident that risk levels will be reduced to the minimum.
Conflicts of interest must be managed appropriately and HLB HAMT understands that. We ensure that the issue is addressed at the correct time and it doesn’t escalate to a serious level. We have the right strategies in place to manage conflicts, be it transactional, relational or any other form of conflict.
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