Corporate Reporting Ethics: Two Kinds of Conflict of Interest

This topic is covered as ETH.6 in our Corporate Reporting Model Answer Notes, which are built entirely from ICAEW Question Bank model answers: https://learn.paradigmshift.training/course/cr-man-2026

Conflicts appear in two quite different forms in Corporate Reporting, and they have different answers. Work out which one the requirement is testing before you start writing, because a well-argued answer to the wrong version scores very little. The distinction is simply this: is the conflict the firm's, or is it an individual's at the client?

When the firm is on both sides

In the Commedia scenario the firm audited both the vendor group and the subsidiary being sold. Both are clients, both have a legitimate call on the firm's services, and their interests in the transaction are directly opposed.

The safeguards are separate teams, information barriers between them, independent partner review of each file, and disclosure of the conflict to those charged with governance at both clients. Consent matters here. The parties need to know that the firm acts for both sides so that they can decide whether they are content for it to continue.

Where separate teams are impractical, the firm may have to decline one of the engagements. That point is worth stating explicitly rather than leaving as an afterthought. Examiners are looking for candidates who recognise that safeguards have limits, and that a small firm, or a specialist team with only one partner qualified to lead the work, may simply be unable to construct the separation the situation demands. A list of safeguards applied automatically, without asking whether they are achievable in this firm, is a weaker answer than one that concludes the work cannot be taken on at all.

When an individual at the client is on both sides

The same shape appears over and over in the papers, with the details rearranged.

A chief executive who is also a director and shareholder of the counterparty to a transaction. A finance director whose wife is the sales manager at a newly appointed supplier. A director with an undisclosed connection, and payments flowing to a company owned by his wife. A chief executive sitting on both sides of a management buyout, negotiating with a board of which he is a member.

In every one of those cases the correct conduct is the same three steps, and they are worth learning as a unit.

Disclose the interest to the board. Absent yourself from both the discussion and the vote, not merely from the vote, since influencing the debate is the more effective way of getting the answer you want. And ensure the transaction is approved independently by those who have no interest in it.

There is statutory backing to cite, and citing it lifts an answer. Directors have a fiduciary duty not to place themselves in a position where their personal interests conflict with those of the company, codified in section 175 of the Companies Act 2006. Where that duty is breached, the company may void the contract. A sentence naming the section and the consequence takes very little time and shows that you know this is a legal obligation rather than a matter of good manners.

The distinction that earns the marks

A related party transaction is not improper in itself. It requires disclosure, and that is generally the end of it. Plenty of perfectly legitimate business is done between connected parties, particularly in owner-managed groups, and an answer that treats every related party dealing as evidence of wrongdoing has misread both the standard and the scenario.

What turns a related party transaction into an ethical issue is one of three things. Non-disclosure of the interest, so that the board approved something without knowing who benefited from it. Terms that are not at arm's length, so that value has moved in a direction it would not have moved between independent parties. Or personal benefit obtained at the company's expense.

Identify which of those applies on the facts, and say which. If none of them applies, say that too, and note that disclosure is nonetheless required. Being able to conclude that something is acceptable is as much a part of professional judgement as being able to conclude that it is not, and scenarios sometimes include a clean related party transaction precisely to see whether you can tell the difference.

So the method runs like this. Decide first whether the conflict belongs to the firm or to an individual at the client. For the firm, reach for separate teams, information barriers, independent review and disclosure to those charged with governance, and acknowledge that declining one engagement may be necessary. For the individual, use disclose, withdraw, approve independently, supported by section 175 and the possibility of the contract being voided. Then say precisely what makes this particular transaction improper rather than merely related.

Do that and you will have covered the ground the model answers cover, in roughly the order they cover it.