Part II. Auditor independence Chapter 6. Conflicts of interest in auditing: are they conducive to corruption?

This chapter will examine and discuss the question whether conflicts of interest in the accountancy and auditing profession are conducive to corruption. In undertaking this enquiry, I will first define what a conflict of interest is and under what type of circumstances and conditions it can arise. The types of circumstances and conditions in which a conflict of interest arises will be illustrated through an examination and discussion of the financial collapse of Enron. In the second part of the chapter I will offer a conceptual account of corruption through an examination of its key features; features that are normally, if not always, present in typical cases of corruption. Through the use of this conceptual account of corruption, I will demonstrate how conflicts of interest in auditing and accounting, as illustrated by the case of Enron, can potentially lead to and result in corruption. Finally, I will discuss ways by which conflicts of interest can be dealt with. Ultimately, the best ethical and governance policy for dealing with conflicts of interest in auditing is to avoid them altogether, as mere disclosure does not eliminate a conflict of interest and its continuing presence thus remains a potential risk that might contribute to corruption. Introduction One of the most important facilitators of corruption is conflict of interest. A conflict of interest occurs when a person or group’s self-regarding interest comes into conflict with their fiduciary duties, or when a person or group has two fiduciary roles and the duties of one compete with the duties of the other. For example, if a member of the Tax Office decided to adjudicate his own tax return, he would have a conflict between his personal self-interest and his fiduciary duty. Again, if an accountant happened also to be the manager of a football club, Some of the material in this paper has appeared previously in a different context and format in Miller, S., Roberts, P. and Spence, E. 2005, Corruption and Anti-Corruption: An Applied Philosophical Approach, Prentice Hall, Englewood Cliffs, NJ.