Ethical Issues in Audit Engagement - Conflicts of Interests and Leakage of Confidential Information

Conflicts of Interests in Audit Engagement

Close family member is defined in MIA Revised-By-Laws as the child of a person. Under Section 310 - Conflicts of Interests of MIA Revised-By-Laws, conflict of interest arises when the interests of an auditor concerning the audit engagement matter and the interests of the client for whom the auditor provides audit and assurance service conflict. The interests may be in the form of financial interest, personal interest caused by a close personal relationship, or public interest.

In this case, Juswir, as a member of the audit engagement team for Richardson Bhd, isin the position of having a conflict of interest by auditing the company. Firstly, he is the son of the CEO of the audit client, which raises the potential ethical issue of self-interest as his close relationship with the CEO puts him in a position to defend the client in the event of any disputes between the auditors and the client. Juswir may conflict with carrying out his duty as the auditor diligently and sceptically, at the same time has to manage the potential contradictory opinion raised by his audit colleagues on his father’s company. Besides, Juswir holding a significant  sum of ordinary share capital in the client company further raised his conflicts of interests to audit the company, given his shareholding and financial interest in the company may lead to him intentionally covering, omitting or bypassing the seemingly misleading information of the This conflict of interest further led to the concern on whether or not Juswir can maintain sufficient scepticism and competency in issuing audit opinions on Richardson Bhd’s financial statement.

Furthermore, it is important to take note that the action of Alexander being the audit manager of the team that allowed Juswir to stay in the engagement team has further raised the ethical consideration behind this conflicting situation. Knowingly allowing a member which has conflicts of interest with the client to remain in the audit team indicates that Alexander might be negligent, or intentionally ignorant in avoiding conflict of interest issues to happen in an audit engagement.

Clearly, objectivity has been breached in this case. By allowing Juswir who has a conflict of personal and financial interest with the audit client creates threats to compliance with the principle of objectivity. The conflict of personal interest as the son of Richardson Bhd puts Juswir in a position of allowing his biasness to override his objectivity of judgement, at the same time raising the possibility of Juswir being influenced by his father to recklessly furnish, omit or obscure information that would be intentionally misleading. Whereas thefinancial interest of Juswir linked him to the wealth of the company, further raising the

Definition of Close Family Member in MIA Revised-By-Laws

possibility of him allowing his personal wealth interest to override his professional judgementsthroughout the audit engagement with Richardson Bhd.

Besides, the fact that Alexander has failed to ask his team member who has a close family relationship with the client to withdraw from the engagement team also points to a possible lack of professional behaviour and professional competence and due care. As asuperior, his action of allowing Juswir to stay in the engagement team has spoiled his professional image as a competent manager in his subordinates’ eyes, particularly Jessica. Alexander’s behaviour of knowingly letting Juswir stay in the team, as well as Juswir who did not withdraw from engaging with Richardson Bhd’s audit despite clearly knowing he is in the position of conflicts of interests, clearly show that both Alexander as the superior and Juswir as the audit team member fail to practice sufficient level of due care in avoiding relevant party relationship in practicing their professional relationships with the client.

a) Discuss the potential threats raised in this ethical issue. 120words

b) Discuss necessary safeguards (internal controls) to reduce the threats to an

Conflicts of Interests of MIA Revised-By-Laws speak about confidentiality, whereby a professional accountant in public practice shall remain alert to the principle of confidentiality, including when sharing information of the client with third parties. It is important to note that every professional accountant in public practice shall respect the  confidentiality of information acquired as a result of professional relationships, and thereforenot disclose any such information to third parties without proper and specific authority or consent by the client unless there is a legal or professional right or duty to disclose. Professional accountantsshall not use such information for personal advantage, as this will lead to conflicts of interest.

In this case, Olivia being the auditor of Richardson Bhd leaked the information about the acquisition of Sunshine Bhd by Richardson Bhd which she gained the information from her professional relationship with Richardson Bhd to her family members. Despite not getting any permission from the client, Olivia used the information to convince her family members to purchase the shares of Richardson Bhd, given the potential rise of the share price of the company in the near future. This behaviour of her using the confidential information of clients to gain an insider trading advantage for her family members raises the concern on her ethics in respecting her client’s confidential information. The public may perceive that Olivia being a professional accountant in public practice used to be unethical by deriving benefits from the client’s confidential and sensitive information.

The first fundamental principle being breached concerning the leakage of information about the forthcoming acquisition is confidentiality. Olivia as a professional accountant in practice is expected to maintain and respect the confidentiality of information gained from her professional audit engagement relationship with clients at all times. However, by telling her family members about the information acquired as the result of business/professional relationships which are not in the public domain, Olivia has breached the fundamental principle of confidentiality. In fact, she is not allowed to disclose any such confidential acquisition information to third parties without proper and specific authority or consent by Richardson Bhd. In this case, there is no indication that the client has permitted Olivia to disclose the information of potential acquisition to the public.

Besides, professional behaviour was also breached in this case, whereby Olivia’s behaviour of talking at length to her family members whilst working time breaches her professional behaviour as an accountant. This behaviour of Olivia means that the client is not getting the time that they are paying for, hence bringing discredit to the accounting profession.In addition, if Olivia’s behaviour of disrespecting her client by leaking confidential informationto family members is known by the client and the public, this will further worsen the image of professionalism of the auditors in the eye of the client and public.

Furthermore, the behaviour of Olivia deriving a personal benefit from her professionalrelationship with Richardson Bhd raised the concern on her objectivity, as she allows her family members’ interests to override her responsibility in respecting her client’s confidential information. Arguably, when the client realised about the behaviour of Olivia, her integritymay also be questioned since she was being dishonest in her professional relationship with the client.

a) Discuss the potential threats raised in this ethical issue. 120 words

b) Discuss necessary safeguards (internal controls) to reduce the threats to an Acceptable level. 120 words