Enquiry:

Our firm has been appointed by Communication & Works Department, Government of the Punjab (GOPb) to carry out the assignment relating to M/s. ABC Private Limited (“the company”), which has undertaken a road project on Build Operate Transfer (BOT) basis, for the following scope of work:

a) to review and certify, monthly statement of transactions undertaken from the project maintenance/escrow account in accordance with the provisions of the agreement related to the project.
b) To audit and certify, the basis and computation of the claim by the RBOC related to compensation for cost resulting from changes in design in accordance with the provisions of the agreement related to the project.
c) To audit and certify, the basis and computation of the claim by the RBOC or GOPb related to request for the revision of toll rates and for an appropriate amendment in the toll escalation rules and where necessary in accordance with the provisions of the agreement related to the project.
d) To audit and verify the claim of loss by RBOC and provide amount due and payable with respect of the claim in accordance with the provisions of the agreement related to the project.
e) To audit and verify the basis of computation of any other claims under this agreement filed by RBOC or the GOPb as defined in clause 33.2.1 of the agreement related to the project.
f) To review any and all audit reports issued by the RBOC auditor for correctness and compliance in accordance with the provisions of the agreement related to the project.

The period relating to the above assignment is from October, 2003 to September, 2028. The financial statements of the company are audited by another firm M/s. XYZ & Co. Chartered Accountants. Our partners, Mr. G & Mr. F were partners of M/s. XYZ & Co. Chartered Accountants till May 2006. During the period, the financial statements of the company for the half year ended Dec 31, 2004 & year ended June 30 2005 were audited by M/s. XYZ & Co. Chartered Accountants as per accounts provided by M/s. ABC Private Limited and the audit reports were signed by Mr. G.

In the light of the above, kindly give us Committee’s opinion if there is a conflict of interest under either of the following circumstances:

i. Partner who remained the partners in M/s. XYZ & Co. is engagement partner of the assignment.
ii. Another partner of M/s. XYZ & Co. who never remained part of M/s. XYZ & Co. is engagement partner of the assignment.

Opinion:

We would like to refer revised ICAP Code of Ethics for Chartered Accountants (the Code) which institutes the fundamental principles of professional ethics and provides a conceptual framework for applying those principles. One of the basic elements of the framework is ‘Independence’. It is important to note that independence of mind and in appearance is necessary to enable the practicing chartered accountants to enable them to express a conclusion, without bias, conflict of interest or undue influence.

Practicing chartered accountants are expected to provide an assurance and variety of non-assurance services that are consistent with their skills and expertise. While rendering other services to an audit client, practicing chartered accountants are required to apply the conceptual framework to identify threats to compliance with the fundamental principles and assess their significance and implication.

The onus of evaluation of such threats to compliance with the fundamental principles rests on the practicing chartered accountants and they should consider qualitative as well as quantitative factors while performing such evaluation. Such obligation on the part of a practicing chartered accountant becomes more critical in a situation where the applicable guidelines or regulations do not clearly prohibit any specific service. Relationships should be avoided which allow prejudice, bias or influences of others to override objectivity.

In this connection, the Committee would also like to refer the following paras of section 220 ‘Conflict of Interest’ of the Code which states:

“220.1 A chartered accountant may be faced with a conflict of interest when undertaking a professional activity. A conflict of interest creates a threat to objectivity and may create threats to the other fundamental principles. Such threats may be created when:

• The chartered accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict; or
• The interests of the chartered accountant with respect to a particular matter and the interests of the client for whom the chartered accountant provides a professional service related to that matter are in conflict. (Underline is ours)

A chartered accountant shall not allow a conflict of interest to compromise professional or business judgment. When the professional service is an assurance service, compliance with the fundamental principle of objectivity also requires being independent of assurance clients in accordance with Sections 290 or 291 as appropriate.”

“220.3 When identifying and evaluating the interests and relationships that might create a conflict of interest and implementing safeguards, when necessary, to eliminate or reduce any threat to compliance with the fundamental principles to an acceptable level, a chartered accountant in practice shall exercise professional judgment and take into account whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the chartered accountant at the time, would be likely to conclude that compliance with the fundamental principles is not compromised.”

“220.5 If the threat created by a conflict of interest is not at an acceptable level, the chartered accountant in practice shall apply safeguards to eliminate the threat or reduce it to an acceptable level. If safeguards cannot reduce the threat to an acceptable level, the chartered accountant shall decline to perform or shall discontinue professional services that would result in the conflict of interest; or shall terminate relevant relationships or dispose of relevant interests to eliminate the threat or reduce it to an acceptable level.”

“220.6 Before accepting a new client relationship, engagement, or business relationship, a chartered accountant in practice shall take reasonable steps to identify circumstances that might create a conflict of interest, including identification of:

• The nature of the relevant interests and relationships between the parties involved; and
• The nature of the service and its implication for relevant parties.

The nature of the services and the relevant interests and relationships may change during the course of the engagement. This is particularly true when a chartered accountant is asked to conduct an engagement in a situation that may become adversarial, even though the parties who engage the chartered accountant may not initially be involved in a dispute. The chartered accountant shall remain alert to such changes for the purpose of identifying circumstances that might create a conflict of interest.”

In the light of above, the Committee views on your queries are as follows:

1. To avoid a risk of conflict of interest, the Code requires that safeguards should be applied, when necessary, to eliminate or reduce any threat to compliance with the fundamental principles to an acceptable level. In Committee’s view, there is a self-review threat for partners, Mr. G & Mr. F as their previous firm has done external audit for the half year ended 31 December, 2004 and year ended 30 June, 2005. Therefore, they should not act as engagement partners or technical/ quality review partners for those years.

The Committee is also of the view that it is the duty of the incoming auditor to guard against independence/ familiarity threats, if any, including the cooling-off period of the outgoing partner(s). Section 290.149 of the Code requires cooling off period of two years for clients who are public interest entities. For private companies no such requirement is given. However, firms may have longer cooling-off periods as per their respective partnership arrangements

2. No apparent conflict of interest arises in the inquired situation.

(November 25, 2016)