Independence and Conflict of interest
The importance of independence when building trust in society
As a professional service firm, independence is a prerequisite for our licence to operate. When it comes to auditing financial statements, auditors need to bring judgement and objectivity that fully relies on independence. Building transparency and trust is key when we provide assurance for private investors and/or for the financial markets. Reliable financial statements enable society at large to make informed decisions. Compromised auditor independence can lead to the opposite and can thus have negative impacts on society.
Safeguarding our client independence
We have in place a variety of tools, trainings and checks to safeguard our client independence.
The “CES” tool to prevent non-compliance with independence rules
The work of our people is subject to a variety of international independence requirements and internal PwC independence policies. In order for our people to keep track of and comply with these rules, we are working with independence tools, such as the Central Entity Service (CES).
The CES shows how entities are linked to each other in simple organisational charts and indicates which are the independence rules related to each entity of a group. Every time we enter a new business relationship or engagement with a client, our teams are required to check through CES to see whether the client is subject to any service restrictions, and to determine the permitted services that we can offer.
CASE STUDY: RESTRICTED SERVICES
A new potential client asks us to audit the financial statements of his investment fund. To find out whether or not we can accept the service, the PwC Luxembourg engagement team checks in CES if there are independence-related service restrictions linked to the investment fund.
The team sees that the fund currently is investing in several entities whose valuation is performed by PwC Italy. In this case, PwC Luxembourg would have to audit a work done by our Italian colleagues, which implies a breach of independence according to GIP independence standards. Consequently, PwC Luxembourg cannot serve the client.
Training our people to reduce independence risk
In our daily work, our people, from trainee to partner, are faced with potential independence risks of business-related and personal nature. To make sure that they understand the independence requirements related to their job and know the procedures and controls to reduce the risk of non-compliance, we engage them in independence training.
Performing independence checks
Our firm is led by a privately held partnership (see ‘Governance’), with all significant decisions being made by the CEO and his Country Leadership Team (CLT), who themselves are supervised by the Supervisory Board (SB). To be eligible for election, all new PwC partner candidates, as well as CEO, CLT and SB candidates must pass an independence test. Those who do not pass the test will not be accepted into the role. This strict process is key, as we want all individuals who are part of the leadership team to lead by prime example.
Moreover, all individuals who sign accounts (partners and directors) are tested on their independence every six years.
Managing conflicts of interest - for our independence and because it’s the right thing to do
Every conflict of interest potentially masks more serious compliance issues relating to fraud and even legal violations. That is why, a key element of safeguarding our independence is to keep our people free from professional and personal interests that could compromise their ability to work impartially. However, our motivation to manage conflicts of interest goes far beyond independence matters. We believe that it is simply the right thing to do. We want to ensure that PwC and its employees behave ethically and fairly between themselves, towards our clients, our suppliers and any stakeholders in general.
Committing our people to declaring all conflicts of interest
We have in place a Code of Conduct (see ‘Legitimacy & Ethics’), which is our guiding principle of dealing with conflict of interest. We also offer a range of training to give our people relatable examples of how to react when faced with conflict of interest in our daily work. This year, we decided to go one step further. For our teams to formally admit their responsibility for avoiding conflicts of interest, we have added a specific question in the yearly independence confirmation for our people to confirm by signature that they have declared all conflicts of interest they are subject to.
Encouraging reporting of conflict of interest cases
We want our people to report all conflict of interest matters that they see themselves, or that others are involved in, to our designated Ethics and Business Conduct Committee (see ‘Legitimacy & Ethics’). Last financial year, 10 conflict of interest cases were brought up and followed up by them.
This material references Disclosures 102-17, 102-25, 102-44, 102-46, 102-47, 103-1, 103-2 and 103-3.