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Conflict of interest guidance

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07 September 2021

Contents

This guidance concerns conflict of interest (COI) issues for registered greenhouse and energy auditors. It is not legal advice or a substitute for legal advice on legislative requirements. Auditors are encouraged to seek their own legal advice on their obligations under relevant legislation and to use their own professional judgement.

What is COI and why is it important?

Conflict of interest is defined in regulation 6.49 of the National Greenhouse and Energy Reporting Regulations 2008 (NGER Regulations):

A conflict of interest situation exists in relation to an audited body at a particular time if, because of circumstances that exist at that time:

  1. the audit team leader, or a professional member of the audit team, is not capable of exercising objective and impartial judgement in relation to the conduct of the Part 6 audit; or
  2. a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the audit team leader, or a professional member of the audit team, is not capable of exercising objective and impartial judgement in relation to the conduct of the audit.

In a perceived COI situation, a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the auditor may not be capable of exercising objective and impartial judgement in relation to conducting an audit.

Ensuring that COI issues do not impact on an audit is fundamental to the audit process. If an auditor does not deal with a COI appropriately, then the auditor’s objectivity and impartial judgement are open to doubt. This undermines the credibility of the audit. This is why the NGER Regulations set out extensive obligations for greenhouse and energy auditors for dealing with COI and other independence issues. In particular, auditors are to be aware of the requirements set out in subdivisions 6.6.3 to 6.6.5 of the NGER Regulations. These are legislative requirements that greenhouse and energy auditors must meet.

Dealing properly with COI issues is not easy. There are many circumstances that can prevent an auditor from resolving a COI issue satisfactorily. Auditors must successfully deal with:

  • the pressure to meet client expectations
  • the need to get work completed within deadlines
  • pressure to hit revenue targets for the firm
  • a desire to rationalise their decisions by believing that their judgement is better than that of others
  • temptation to minimise the impact of their decisions believing no one else will find out or be hurt
  • tendency to convince themselves that the matter is immaterial or that everyone else does it.

An auditor may also be afraid of the consequences of dealing with COI issues. This could include losing a client or disappointing others. For example, if a team member was to disclose that they had a financial interest or personal relationship with an audit client.

Auditors must cope with such pressures and ensure they deal with COI issues properly.

Independence and fundamental ethical principles

Auditors have an overarching requirement to be independent from the audited body. More on this concept can be found in Independence Guide published by the Accounting Professional & Ethical Standards Board Limited (APESB), Chartered Accountants Australia and New Zealand, CPA Australia and the Institute of Public Accountants. The guide describes the concept as:

  1. Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism
  2. Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an assurance team member’s integrity, objectivity or professional scepticism has been compromised. Even if independence exists, it may not appear to exist because of confusion over the facts of the situation or a lack of understanding by a third party.

Independence is linked to the five fundamental ethical principles all auditors must follow. These are also detailed in the Independence Guide from APESB. These principles are:

  1. Integrity
    • Be straightforward and honest in all professional and business relationships.
  2. Objectivity
    • Do not compromise professional or business judgements because of bias, conflict of interest or undue influence of others.
  3. Professional competence and due care
    • Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional activities, based on current technical and professional standards and relevant legislation.
    • Act diligently and in accordance with applicable technical and professional standards.
  4. Confidentiality
    • Respect the confidentiality of information acquired as result of professional and business relationships.
  5. Professional behaviour
    • Comply with relevant laws and regulations and avoid any conduct that the auditor knows or should know might discredit the profession.

A COI issue is a threat to an auditor’s objectivity. It may also undermine the auditor’s ability to uphold the other principles, but the clear threat is to objectivity.

Conflict of interest and independence are related but different concepts. It is fundamental to audits that an auditor is independent of the audited body. In order for an auditor to be independent, they must deal with COI issues appropriately and sufficiently. However, independence includes other aspects as well, for example auditor rotation. The legislative requirements on auditor rotation are listed in regulation 6.59 of the NGER Regulations.

Framework for dealing with COI

The audit standards set out a conceptual framework for dealing with COI issues. This framework involves three steps:

  1. Identify any COI issues
  2. Evaluate the issues
  3. Address the issues — eliminate or reduce to an acceptable level.

When using this framework, the audit standards require auditors to:

  • exercise professional judgement
  • remain alert for new information and to changes in facts and/or circumstances
  • use the reasonable and informed third party test (discussed in section on evaluating COI issues).

Identifying COI

The first step is to identify the facts and circumstances that might constitute a conflict of interest. These include professional activities, interests and relationships.

The framework focuses on five threats to an auditor’s independence. If an auditor does not deal appropriately with any of these threats, then it represents a competing interest or loyalty — a conflict of interest. The threats are:

  • self-interest
  • self-review
  • familiarity
  • intimidation
  • advocacy.

Self-interest

The self-interest threat is that financial or other interests may influence an auditor’s judgement or behaviour. It is a common one. Examples of this threat include:

  • High level of fee dependency on the organisation being audited.
  • Participants in the audit having a financial interest in the audited body.

Self-review

This is the threat of not appropriately evaluating the results of a previous judgement or activity the auditor, or another individual within their audit firm, performed, and the auditor relies on those results when forming a judgement as part of performing 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

Under this threat, an auditor will be too sympathetic to the interests of an audited body, or too accepting of their work — the auditor’s objectivity is compromised. This may result from a long or close relationship with the audited body or another relevant person. Examples of this threat include:

  • An audit team leader using 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 COI.

Intimidation

This is the threat that an auditor will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over them. An example of this threat is:

  • An audited body placing excessive pressure for the audit to be completed by a certain date.

Advocacy

In this threat, an auditor will promote an audited body’s position to the point that the auditor’s objectivity is compromised. An example of this threat is:

  • The audited body asking the auditor to act as a referee for them in a business proposal.

Know the risks

To effectively identify threats to independence, auditors also need to know the risk factors that may lead to a COI issue not being identified, and also the factors that may lead to their own judgement being impaired or influenced.

One of the most effective safeguards can be to seek the advice of others that are not directly involved in the situation. This not only helps the auditor understand perspectives that may be different to their own, it also helps ensure their decision making is objective and free from these influences and biases.

So, when faced with these decisions, it can be helpful for an auditor to ask themselves:

  • Is their behaviour consistent with ethical and professional standards, especially around integrity?
  • Does their decision reflect the right thing to do and is driven by responsible professional judgement?

Evaluating issues

The second step is to evaluate whether the threat of a COI issue is at an ‘acceptable level’. This is a level at which the auditor using the reasonable and informed third party test would likely conclude that they comply with the fundamental ethical principles.

The reasonable and informed third party test

This test is a consideration by the auditor about whether a reasonable and informed third party would reach the same audit conclusions as the auditor did. This is on the basis of the third-party having access to all the relevant facts and circumstances that the auditor knows, or could reasonably be expected to know, at the time the conclusions were made.

The reasonable and informed third party does not need to be an auditor but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the auditor’s conclusions in an impartial manner.

Examples of reasonable and informed third parties may include regulators — such as employees of the Clean Energy Regulator — board members, senior members in business or public practice or investors.

Factors relevant for evaluating issues

The consideration of qualitative and quantitative factors is relevant to an auditor’s evaluation of issues, as is the combined effect of multiple issues, if applicable. If multiple issues are identified they are evaluated in aggregate, even if the issues are individually insignificant.

Other examples of factors relevant to the audited body and its operating environment that may impact on the evaluation of the level of a threat can be found in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (APES 110).

Addressing issues

If a COI issue is evaluated as not being at an acceptable level, the final step in the conceptual framework is to address the issue by eliminating or reducing it to an acceptable level by:

  1. Eliminating the circumstances, including interests or relationships, that are causing the issue.
  2. Applying safeguards, where available and capable of being applied, to reduce the issue to an acceptable level.
  3. Declining or ending the audit.

Depending on the facts and circumstances, an issue might be addressed by eliminating the circumstances causing the COI issue. However, in some situations declining or ending the audit may be the only way to address the issue as the circumstances creating it cannot be eliminated and safeguards are not capable of being applied to reduce the issue to an acceptable level.

APES 110 defines safeguards as actions, individually or in combination, that an auditor can take that effectively reduces issues to an acceptable level.

The auditor must conclude whether overall the actions they have taken eliminate or reduce the issues to an acceptable level, including reviewing significant judgements made or conclusions reached and using the reasonable and informed third party test.

Evidence to keep on audit file

Dealing appropriately and sufficiently with a COI issue is not enough. How it was dealt with needs to be recorded on the audit file.

The audit file should have clear documentation of significant decisions and judgements in the audit. Decisions around conflicts of interest are likely to involve significant judgement. In dealing with a COI issue, the audit file needs to include evidence of:

  • acceptance and continuance considerations of the issue
    • covers firm-level COI considerations.
  • declarations of independence from the:
    • audit team leader
    • professional members of the audit team
    • external experts
    • peer reviewer.
  • independence declarations are both timely and include the right entities
  • timely communication with the audited body of independence declarations
  • threats being identified, evaluated and addressed.

All of these points are important, but particularly the last one. Also, it is vital that these pieces of evidence are signed and dated at the appropriate time.

Legislation and standards

There is a range of legislation and audit standards that auditors need to know, understand and use when dealing with COI issues:

  • National Greenhouse and Energy Reporting Regulations 2008 (NGER Regulations — Subdivisions 6.6.3-6.6.5)
  • National Greenhouse and Energy Reporting (Audit) Determination 2009 (Audit Determination — Section 2.4)
  • Auditing Standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements (ASQC 1)
  • Standard on Assurance Engagements ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ASAE 3000)
  • APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (APES 110)
  • APES 320 Quality Control for Firms (APES 320).

Greenhouse and energy auditors are required to comply with the legislation — both the NGER Regulations and the Audit Determination. The Audit Determination (section 2.5) also requires audit team leaders to ensure that an audit is carried out and reported on in compliance with the auditing standards.

NGER Regulations

Subdivisions 6.6.3-6.6.5 set out legislative requirements regarding COI and other independence issues.

In particular, regulation 6.47 sets out requirements for registered greenhouse and energy auditors in regard to COI issues. These include:

  • Regulation 6.47(2): an audit team leader must as soon as possible after they become aware that a COI situation exists take ‘all reasonable steps’ to ensure that the situation ceases to exist.
  • Regulation 6.47(3): if a COI situation relates to an audit team leader, then within 28 days of them becoming aware of the situation they must cease to be the audit team leader and notify the Regulator and the audited body in writing of this decision.
  • Regulation 6.47(4): if a COI situation relates to a professional member of the audit team, then before the end of 28 days from the audit team leader becoming aware of the situation, they must apply under regulation 6.71 for an exemption from the requirements of regulation 6.47.
  • Regulation 6.47(6): an audit team member must cease to be a member of the audit team within 28 days of the audit team leader becoming aware of a COI situation involving the team member if no exemption under regulation 6.71 has been applied for.
  • Regulation 6.47(7): an audit team member must cease to be a member of the audit team within 28 days of the team leader becoming aware of a COI situation involving the team member if an exemption under regulation 6.71 has been applied for but not granted.
  • Regulation 6.47(7): an audit team leader has breached this regulation if they were not aware of a COI issue but would have been aware if they had had in place a quality control system that was reasonably capable of making them aware of the existence of such an issue.

Note the emphasis in the regulations on the timing of the audit team leader becoming aware of a COI situation and the deadlines this sets.

The NGER Regulations detail a number of requirements around COI and independence, apart from those listed above. These include subdivisions 6.6.4 and 6.6.5, which impose particular requirements on audit team leaders.

Audit Determination

Section 2.4 — Independence and conduct declaration. Before agreeing to the terms of engagement for the audit, the audit team leader must sign an independence and conduct declaration and give it to the person who appoints the audit team leader to carry out the audit.

Declarations are for:

  • audit team leader
  • professional members of the audit team.

Regulation 6.50 of the NGER Regulations defines ‘professional members of the audit team’ as any:

  1. registered greenhouse and energy auditor who assists in the carrying out of the audit
  2. other person who assists in the carrying out of the audit and, in the course of doing so, exercises professional judgement in relation to the application of, or compliance with, the Audit Determination and these Regulations
  3. other person who is in a position to directly influence the outcome of the audit because of the role they play in the design, planning, management, supervision or oversight of the audit
  4. person who provides, or takes part in providing, quality control for the audit.

Peer reviewers are usually not considered members of the audit team. However, as per Regulation 6.50 they are considered, for audits conducted under schemes the agency administers, to be ‘professional members of the audit team’. The requirements for independence and conduct declarations therefore apply to them.

ASQC 1

Auditing Standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements (ASQC 1). The key points from this standard are:

  • The need to consider independence and conflict of interest from the perspective of the audit firm itself, and at the individual level.
  • The requirement for specific policies and procedures to be established covering independence, such as communicating independence requirements to firm personnel through to the monitoring of compliance with the established policies.

ASAE 3000

Standard on Assurance Engagements ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ASAE 3000) is the key audit standard used in audits under schemes the agency administers. A couple of key points to note from this standard are:

  • The need to establish independence before accepting an engagement.
  • It also contains a detailed list of specific matters that should be considered when establishing policies and evaluating independence. Examples that you will see include policies related to long association with audit clients and gifts and hospitality.

APES 110

APES 110 Code of Ethics for Professional Accountants (including Independence Standards) is the key guidance document for ethical behaviour by professional accountants. All greenhouse and energy auditors are to follow the stipulations of APES 110 when they conduct audits under schemes the agency administers. The exception to this is that legislative requirements take precedence over APES 110.

APES 320

APES 320 Quality Control for Firms (APES 320) sets the obligations for accounting firms to establish and maintain a quality control system. It supplements ASQC 1.

APES 320 highlights the need to have policies and procedures around communicating independence requirements to personnel and around the identification and evaluation of circumstances and relationships that may be threats to independence.

Conclusion

There are six key principles for greenhouse and energy auditors in dealing with COI issues:

  1. Auditors must be able to identify threats to their independence.
  2. A COI can be actual or perceived.
  3. A COI can concern anybody involved with conducting an audit.
    • This includes team members, peer reviewers and external experts.
  4. Know and follow the legislation, audit standards, agency policy and guidance on COI.
  5. If an auditor has any concerns or doubts, consult with the agency.
    • These issues are complicated and involve many subtleties so the agency cannot provide general rules beyond those embodied in the legislation and standards — every case is unique.
  6. Auditors must use their professional judgement to identify and resolve COI issues.
    • They are accountable for their actions in dealing with these issues and the consequences flowing from them.

What auditors need to do

There are a number of actions auditors need to undertake to ensure they are properly prepared to deal with COI issues:

  • Make sure they know the requirements in the legislation and audit standards.
  • Review their firm’s system of quality control and make sure it continues to meet the requirements.

    (Note that the AUASB has issued two new standards that have an operative date of 15 December 2022, and which replace the current ASQC1. These are ASQM1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements, and ASQM2 Engagement Quality Reviews.)

  • Assess whether the processes they use for meeting the requirements are appropriate.
  • Think about their audit team members, external experts and peer reviewers — how well do they understand the requirements?
  • Consider how effectively they are monitoring the way you deal with COI issues.
  • Read and consider guidance the Clean Energy Regulator issues.

Always remember:

  • If an auditor has any potential COI issues, contact the agency to discuss them.
  • Auditors are ultimately responsible for dealing with COI issues and will be accountable for them.

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