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Auditing conflicts of interest

Keen understanding of the client’s third-party transactions is necessary to avoid any conflicts with the audit.It is essential to be aware that one client has businesses involved with another client, represented by the same firm. If one firm is representing two or more clients who are interrelated to each other through material transactions, it would be prudent for the firm to keep only one of the clients and let go of the remaining ones. However, to avoid any issues of this sort, it is essential to make sure that the transactions are recorded and correctly accounted for and disclosed in the financial statements.

Affiliates: For accomplishing a transparent audit, it is necessary to know what a related party is and what types of transactions may occur between relevant parties. If corporation Uno owns and controls corporation Pi then, corporation Uno and Pi are affiliates of each other. Now, if the corporation Pi owns shares of any other organization, for example, corporation Omega then, it can be established that corporation Uno and Omega are affiliated too, through the corporation Pi.

Ownership through the company equity:If one company owns the stocks of another, any where between 20-50 then, they use this method.

Principal owners:The principal owner reserves more than 10% of a company’s voting rights

Management:The management consists of individuals who influence the decisions taken by the company. They are members of the board of directors, officers of the corporation, or other similarly significant persons. Immediate family members of principal owners or managers: spouse, parent, child, sibling, mother-in-law, father-in-law, daughter-in-law, brother-in-law, and sister-in-law fall within this category.

Voting shareholder:This term refers to two types of shareholders. Common shareholders are the ultimate owners of a corporation and have the privilege of voting. For example, the common record-holders vote to elect the board of directors of the corporation.

Being independent and impartial is a must for public officials so that there is proper functioning of a democratic government. This objective could be impaired if there is a conflict between the private interests of a government employee and his or her duties. The procedures of the institute cover potential conflicts of interest of an employee representing a business in which that individual has a significant financial investment and the consulting services.

The guidance of the Institute clearly states that no employee can audit a conflict of interest unless approved by the management, following the provisions of the policy.

Conflict in interest may occur if it has been determined that it may potentially affect the plan, performance,or reduce funding for a probable sponsor. In the event of a conflict of interest, the responsible representative of the institution shall determine which restrictions, if any, should be imposed by the institution to manage, reduce or eliminate such conflict of interest before the expenditure of any such funds by the institution.

A conflict-of-interest audit will involve interviews and critical reviews—documentation to ensure that the objectives of the process are fulfilled. A complete declaration of the questions asked and the resolution shared with the clients, for the conflicts of interest that occurred should be mentioned by the concerned person, after understanding the organization’s policy.

For a company to support the management for conflicts of interest, the internal auditor can use the available tools. A company will have to face both public embarrassment and legal obligations if they fail to prevent conflicts of interest. A company is best served by having policies and guidelines that are well understood by the leadership and the workforce.


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Balaram Vuchidi

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