Indirect financial interest definition
/What is an Indirect Financial Interest?
An indirect financial interest is a financial interest that is beneficially owned through an investment vehicle or other intermediary when the beneficiary does not control the intermediary and does not have the authority to supervise or participate in the investment decisions of the intermediary.
The concept is of considerable importance for an auditor, when deciding whether he or she is properly independent from an attest client. Depending on the situation, the existence of an indirect financial interest could compromise an auditor’s independence.
Example of an Indirect Financial Interest
Sally Jones, CPA owns shares in a non-diversified mutual fund which owns shares in one of Jones’ clients, Rockwell Morgan International. The net assets held by the mutual fund are $100 million. Ms. Jones owns 2% of the fund’s shares, which have a value of $2 million. The fund has invested 15% of its assets in Rockwell Morgan.
Ms. Jones can then calculate her indirect financial interest in Rockwell Morgan as 15% of her $2 million investment in the fund, or $300,000. She must then compare this indirect financial interest to her net worth to decide whether the investment in Rockwell Morgan is material.