Possible Undisclosed Conflict of Interests
Intended audience: Professional Accountants in Business
You are a non-executive director and Chairman of the audit committee at X Ltd, a major heavy engineering company which is a listed company. The company has recently been visited by a firm of consultants, Y LLP, at the request of your Chairman, Mr A, who has been reviewing the company’s IT systems and procedures with a view to trying to make them more efficient and effective. It is planned that after Y LLP’s review, a contract will be awarded to another organisation to take forward the recommendations included in their report. The Chairman does not believe it would be a good idea to allow the same organisation to undertake the work on which they had reported as this would possibly provide an incentive for them to overstate the level of work required.
You had been instrumental in getting the Chairman to take this project forward based on recent reports given by the external auditors to the audit committee. You had been surprised that the Chairman had readily agreed to the need for such a review without a detailed discussion on the likely cost – the Chairman did not like spending money unless it was absolutely necessary – and had advised you to leave it with him. Within a few days of your conversation, Y LLP had been appointed.
Whilst visiting one of the company’s factories you bump into Mr B, the company’s head of IT. Mr B is not a board member. You get round to discussing the current IT project and are surprised to find out that Mr B is a bit annoyed by the whole process. You would have thought that he would have been pleased with this review because, if anything, his life will become easier and hopefully his extensive workload will be reduced. You ask him why he is unhappy. He advises you that it is most likely that a company called Z Ltd will be awarded the contract by Y LLP. You ask Mr B how he arrives at this conclusion. He advises you that the Chairman is very friendly with Mr C, the senior consultant at Y LLP, and that the Chairman’s son-in-law is a director of Z Ltd. Mr B adds that, although they are always very expensive, they do not necessarily represent the best solution. You thank Mr B for the information and remember to take a mental note to see what develops in the future. It is only natural after all, that management do not like consultants breathing down their necks and this might explain Mr B’s unusually sharp comments.
At the next meeting of the board, Mr C is present and asked to present the findings of Y LLP’s review of X’s IT systems and procedures. He is a very experienced presenter and provides a very informative overview of what has been discovered by his staff. Ultimately, he comes to the recommendations section. He advises that normally his firm would not recommend a specific contractor to undertake the work but merely a list of the work which requires to be undertaken. However, on this occasion he had been specifically asked by the Chairman to recommend the most suitable supplier. He then advises that Z Ltd would appear to be the most suitable choice to undertake work of this nature, although he adds the usual legal caveats to his recommendation. Mr A thanks Mr C for his firm’s insightful work and then asks for comments around the table. You remember Mr B’s comments and decide to probe as to whether there are any conflicts of interest or related parties with respect to Z Ltd. No-one declares an interest. You think to yourself that maybe Mr B was misinformed but he has been right so far. Should you raise this issue at a board meeting with only hearsay as evidence as to the Chairman’s link to Z Ltd?
The Chairman advises that unless anyone says anything to the contrary a motion to award the contract to Z Ltd will be approved.
What do you do now?
Analysis of Scenario: What are the readily-identifiable ethical issues for your decision?
I. For you personally
Can you raise the issue based on what was said to you by the company’s head of IT? Mr B was feeling aggrieved and possibly was merely speculating to whom the contract would be awarded. The Chairman never admitted to any conflict when you broached the issue – haven’t you done enough already?
Is there a need to ask for a postponement of the decision to allow you to have a chat with the Chairman and/or the senior non-independent director? Is there a need to consult with the auditors/legal advisors re the alleged conflict of interests? If the decision is postponed, you could undertake a background check to determine whether the Chairman’s son-in-law is a director of Z Ltd.
II. For the Company
Does the company maintain a register of related parties?
Are conflicts of interest a standing board agenda item?
Does the company have a policy of undertaking a competitive tender for any such contracts?
III. Who are the key parties who can influence, or will be affected by, your decision?
You; the Chairman; the other directors; shareholders; employees; the partners in Y LLP; and the directors and shareholders of Z Ltd.
IV. What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?
- Integrity: Is there a need for you to pursue this matter by asking the Chairman directly if he has any connections with Z Ltd? Could the decision on the contract be postponed to allow you to discuss this matter privately with the Chairman/senior independent director?
- Objectivity: One needs to remain objective and challenge fellow board members as and when appropriate.
- Confidentiality: Did you receive the information in confidence from the head of IT? If so, there is a potential conflict between integrity/professional behaviour and confidentiality.
- Professional behaviour: As per above, the need to ensure that you satisfy yourself that the process for awarding the IT contract has not been distorted.
V. Is there any further information (including legal obligations) or discussion that might be relevant?
As mentioned above, it would be useful to know whether the board has a standing agenda item which requires any conflicts of interest to be disclosed and whether it has a competitive tendering policy. Additionally, seeking feedback from previous customers of Z Ltd in relation to the quality of their work would be useful.
This case study was published by the Technical Policy Board of The Institute of Chartered Accountants of Scotland (ICAS), and adapted by the Institute of Singapore Chartered Accountants (ISCA) with the permission of ICAS.
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