News & Insights

As year end approaches, many businesses will soon be preparing for their annual audits. One key consideration is ensuring there are no potential conflicts of interest that could compromise the integrity of your company’s financial statements. A conflict of interest can cloud an auditor’s judgment and undermine their objectivity. Vigilance in spotting these conflicts is essential to maintain the transparency and reliability of your financial reports.

Understanding 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.

Managing Potential Conflicts

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

• Seek guidance from legal counsel or a professional body on the best path forward
• Disclose the conflict and secure consent from all parties to proceed
• 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.

Safeguarding Financial Reporting

If left unchecked, conflicts of interest can compromise the credibility of your financial statements and expose your company to unnecessary risks. Our firm takes this issue seriously and adheres to rigorous ethical guidelines. If you suspect a conflict exists, contact us to discuss the matter before audit season starts and determine the most appropriate way to handle it. © 2025