Independence and conflicts of interest

When conducting Part 6 audits, an audit team leader is required to make assessments about the accuracy, reliability and completeness of the underlying data or matters of compliance. For these assessments to be unbiased and objective, the audit team leader needs to be free of any other conflicting interests and maintain independence from the audited body.

Key points of guidance around independence and conflicts of interest are included below.

4.5.1 Independence and Code of Conduct declaration

Under section 2.4 of the NGER Audit Determination, before agreeing to the terms of the audit, the audit team leader must sign an independence and conduct declaration and give it to the person who appoints the audit team leader to carry out the audit. This applies for all members of an audit team. It must be documented and may be required when the Clean Energy Regulator conducts a periodic formal review or inspection of a registered greenhouse and energy auditor’s registration, under subdivisions 6.5.3 or 6.5.6 of the NGER Regulations.

The independence and conduct declaration covers all members of the audit team. It must state whether the audit team leader will:

comply with the Greenhouse and Energy Auditor Code of Conduct (regulation 6.46 of the NGER Regulations)
be in any conflict of interest or perceived conflict of interest situations (regulation 6.49 of the NGER Regulations), including whether any exemption has been granted for the conflict of interest situation
comply with the requirements of subdivisions 6.6.3 and 6.6.4 of the NGER Regulations (these subdivisions contain general, specific and independence requirements, which are the subject of the comments in this section of the handbook), and
note any breach of the auditor rotation requirements (regulation 6.59 of the NGER Regulations).

For professional audit team members, the independence and conduct declaration must state whether the team members will:

comply with subregulations 6.47(4), (6) and (7) of the NGER Regulations in relation to conflict of interest situations, and
be in any conflict of interest situations (6.47 of the NGER Regulations), including whether any exemption has been granted for the conflict of interest situation.

In complying with these requirements, auditors are stating whether they have conflicts of interest but this does not guarantee independence.

4.5.2 Greenhouse and Energy Auditor Code of Conduct

All registered greenhouse and energy auditors have agreed to abide by the Greenhouse and Energy Auditor Code of Conduct. Audit team leaders are responsible for ensuring all audit team members abide by the Code of Conduct. Failure to comply with the Code of Conduct may be grounds for suspension or deregistration.

The Code of Conduct includes the following ethical requirements:

compliance with the law
integrity
objectivity
professional competence and due care
marketing and promotion, and
professional behaviour.

A copy of the Greenhouse and Energy Auditor Code of Conduct is included at the end of this handbook.

4.5.3 Conflict of interest situations

Regulation 6.49 of the NGER Regulations covers the meaning of conflict of interest situations.

Regulation 6.56 of the NGER Regulations lists relevant relationships, which are deemed to create a conflict of interest and as such are prohibited for the team leader, professional members of the audit team and certain associated persons.

Regulation 6.47 of the NGER Regulations covers actions the audit team leader must take in the event of a conflict of interest situation.

A conflict of interest situation exists for an audited body if at a particular time:

the audit team leader or professional member of the audit team is not capable of exercising objective and impartial judgement in the conduct of a Part 6 audit, or any other audit conducted for a scheme administered by the Clean Energy Regulator, or
a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the audit team leader or professional member of the audit team is not capable of exercising objective and impartial judgement in the conduct of the Part 6 audit, or any other audit conducted for a scheme administered by the Clean Energy Regulator.

Specific conflict of interest situations are outlined in NGER regulations 6.47 and 6.49.

Auditors must also not participate in schemes the Clean Energy Regulator administers. Auditors are deemed to have a conflict of interest if they:

participate as a proponent, agent or investor in an Emissions Reduction Fund project
bid in Emissions Reduction Fund auctions, or
trade in Australian carbon credit units.

A person seeking to determine if a conflict of interest situation exists must have regard to circumstances arising from any relationship, which exists, is likely to exist or has existed, between the audit team leader or professional member of the audit team and the audited body.

If the audit team leader identifies a breach of the Code of Conduct or a conflict of interest, the audit team leader must take steps to resolve the conflict of interest situation or apply for exemption from the requirements of the NGER Regulations and NGER Audit Determination.

The audit team leader must notify the person appointing the audit team leader of the conflict of interest. The audit team leader must document the conflict and the actions or processes put in place to manage the conflict. Where the Clean Energy Regulator appointed the audit team leader, they will review this documentation and confirm if they are satisfied that the findings of the assurance will not be affected. If there is not acceptable management of the conflict of interest, the audit team leader will not be permitted to perform the assurance.

Regulation 6.71 of the NGER Regulations covers conditions under which exemptions to conflict of interest requirements may be granted by the Clean Energy Regulator.

In identifying conflict of interest situations under the NGER Regulations, which are not specifically prohibited by the NGER Regulations, audit team leaders may refer to APES 110 Code of Ethics for Professional Accountants issued by the APESB.

A conflict of interest situation is likely where any of the following threats to independence exist:

Self-review: An audit team member is required to review and assess work performed by them, another member of the audit team or another member of the same firm.
Advocacy: An audit team member appears to promote or does promote the audited body’s position or conclusion.
Familiarity: An audit team member has a strong relationship with the audited body that may lead them to overly sympathise with the audited body and this places limits on the professional scepticism applied by the audit team member or, by extension, the audit team as a whole.
Intimidation: An audit team member has been or appears to be threatened by the audited body.

Where any of these threats to independence exist, safeguards may be applied to eliminate or reduce the threat. Where appropriate measures are not available, either the relevant team member will need to be excluded from the engagement or the engagement must be declined.

Before agreeing to the engagement terms for the assurance engagement, the audit team must evaluate potential conflicts of interest applying to their team members and firm against the requirements of the NGER Audit Determination and the NGER Regulations.

4.5.4 Common independence issues that can be addressed

The guidance above covers the general and specific independence requirements contained within the NGER Regulations.

However, dealing with independence issues also requires the audit team leader’s professional judgement of the independence threat of the principles provided above, and of the requirements of the NGER Audit Determination and the NGER Regulations.

To illustrate, examples of common independence issues are provided in the table below.

Common issue	Suggested response	Outcomes
The audit team leader’s firm has performed other work for the audited body, which impairs their independence. For example, implementing a system to record and aggregate greenhouse and energy information.	The audit team leader must consider the work performed against each of the principles provided above to build an overall picture of the extent and nature of the threat to independence. The audit team leader must consider excluding potential team members who contributed to other work such as the audited body’s greenhouse and energy report. The materiality of the work is considered in the audit team leader’s assessment.	The audit team leader must make a judgement based on their evaluation against the principles. The audit team leader may have to refuse the engagement (and notify the Clean Energy Regulator) if the independence threat is too great. The NGER Regulations do provide for exemptions in certain cases. It is important to remember that ‘perceived’ independence (that is, would other parties perceive the audit team leader to be independent of the audited body?) must be included in this assessment.
Individual team members have financial or other interests or relationships with the audited body. For example, close relatives occupying key positions in the audited body’s greenhouse and energy reporting functions.	The audit team leader must consider whether the team member’s inclusion in the audit team would impair their independence for the assurance engagement as a whole.	The audit team leader must review the extent of the threat using the principles provided above. If the independence threat is deemed to be significant, the audit team member must be removed from the audit team and their access to all information related to the audit revoked.

Common issue

Suggested response

Outcomes

The audit team leader’s firm has performed other work for the audited body, which impairs their independence.

For example, implementing a system to record and aggregate greenhouse and energy information.

The audit team leader must consider the work performed against each of the principles provided above to build an overall picture of the extent and nature of the threat to independence. The audit team leader must consider excluding potential team members who contributed to other work such as the audited body’s greenhouse and energy report. The materiality of the work is considered in the audit team leader’s assessment.

The audit team leader must make a judgement based on their evaluation against the principles.

The audit team leader may have to refuse the engagement (and notify the Clean Energy Regulator) if the independence threat is too great.

The NGER Regulations do provide for exemptions in certain cases.

It is important to remember that ‘perceived’ independence (that is, would other parties perceive the audit team leader to be independent of the audited body?) must be included in this assessment.

Individual team members have financial or other interests or relationships with the audited body.

For example, close relatives occupying key positions in the audited body’s greenhouse and energy reporting functions.

The audit team leader must consider whether the team member’s inclusion in the audit team would impair their independence for the assurance engagement as a whole.

The audit team leader must review the extent of the threat using the principles provided above.

If the independence threat is deemed to be significant, the audit team member must be removed from the audit team and their access to all information related to the audit revoked.

4.5.5 Audit team leader rotation requirements

The objective of auditor rotation is to promote auditor independence.

Audit team leaders must not be the audit team leader for more than five consecutive Part 6 audits of the same kind carried out in relation to one audited body. Between each set of five consecutive Part 6 audits, there must be at least two successive Part 6 audits where the audited body engages a different audit team leader.

In addition to this requirement, we recommend that auditors do not audit the entire life cycle of an Emissions Reduction Fund project. The Clean Energy Regulator recommends Emissions Reduction Fund participants engage at least two auditors from different audit firms, and audit participants who meet this requirement are less likely to be selected for additional audits.