Conflict of Interest 101 – What they are and how to avoid them?

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A conflict of interest is when someone appears to have two different interests. It can also happen when an individual has two or more roles that are incompatible with each other.

It occurs when the person becomes unreliable because of the conflict between personal and professional interests.

To understand it better, let's split this topic into three broad categories of conflict of interest: actual, potential, and perceived.

1. Actual Conflict of Interest

Actual conflicts of interest are those where a person or business has an immediate personal stake in the outcome of decision making. This means that they are directly impacted financially by the decisions made.

Examples of actual conflicts of interest include:

a. An attorney who represents both sides of a case;

b. A law firm where the partner works both for a client and for themselves;

c. A government official who lobbies on behalf of a company that they regulate;

d. A journalist who writes positively about companies whose stock they invested in.

e. A purchasing manager who purchases supplies from vendors which their family owns.

f. A financial advisor who knowingly advises customers to buy investments that aren't in their best interests.

2. Potential Conflicts of Interest

Potential conflict of interest occurs when a person does not have any direct financial impact from the outcome of a decision but could be affected indirectly as a result of what happens.

Examples of potential conflicts of interest may include:

a. A judge who does not recuse himself from cases involving parties which they personally support;

b. An attorney who was formerly employed by one side but now represents the opposing side.

c. A quality manager of the company who audits products manufactured by their previous company.

3. Perceived Conflict of Interest

Perceived conflicts of interest arise when people believe a possible conflict exists even though it might not exist. In some cases, these perceptions can become so strong that they actually affect how people act.

Examples of perceived conflicts of interest may include:

a. A person who thinks there is corruption at work simply because they cannot understand why certain decisions were made.

b. A person who believes they are being cheated just based upon rumours heard through gossip.

How to avoid conflict of interest?

There are many ways to handle the risks associated with getting caught up in such situations. These include avoiding involvement entirely, taking steps to reduce your risk, disclosing information about the situation and following ethical standards.

1. Avoiding Direct Involvement (Avoid)

Don't get involved in it if you are unsure whether a particular activity poses a conflict of interest. This doesn't mean not participating in activities that are beneficial to you - it just means that you should disclose all relevant facts if you do participate.

2. Take Action to Reduce Risks (Reduce)

The more familiar you are with a situation, the less likely you will make mistakes, especially if you know how rules and regulations apply. To minimize the risk, try to stay current on important issues affecting your area of responsibility. Also, try to understand the reasons behind decisions made in areas that involve you.

3. Disclose Information About the Situation (Disclose)

You must always report any perceived conflicts of interest to your supervisor. The first step is to recognize a problem and determine if disclosure is required. If yes, follow the applicable procedures for reporting conflicts of interest to appropriate authorities.

4. Ethical Standards (Follow)

The most effective way to prevent conflicts of interest is to follow ethical standards. Ethical conduct includes honesty, fairness, accountability, objectivity and confidentiality. To apply ethical principles requires a clear set of rules and procedures that govern relationships between people, organizations and groups. Following ethical standards often means making every effort to achieve transparency and fairness throughout decision-making processes.

Conclusion

Conflicts of interest occur when someone gains an advantage over others due to their knowledge or involvement in a situation. They can also arise from having access to privileged information, opportunities or resources.

In general, these types of conflicts can negatively impact a firm's performance by causing unethical behaviours, such as fraud, conflicts of interests, and unethical practices. Therefore, it is essential to manage them effectively.

 

Disclaimer: We are not a law firm and are not acting as your attorney. The information contained on the Site is general legal information for quality certification exam preparation. It should not be considered as legal advice to be applied to any specific factual situation. For any legal advice, you should consult a lawyer.

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