2. Conflict of interests By definition, a conflict of interest is a situation where an individual or an organization, an agent, has multiple interests and of those interests one could possibly corrupt the motivation for an act in the other. Generally, a conflict of interest presupposes a circumstance where the agent is entrusted with some impartiality (objectivity or independence). The presence of a conflict of interest is independent from the execution of impropriety. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption occurs. As an illustrative example of conflict of interest, think of a self-dealing conflict of interest situation when a government official responsible for computer equipment purchases, decides to enter into a transaction with a company that the official owns himself. As a result the decision maker is on the both sides of the transaction: buyer and supplier. In accounting and auditing contexts conflict of interest usually refers to the conflicts between shareholders and managers' objectives in agency relationships (see Figure 2 below) As noted, if in an agency relationship ownership is separated from control and both agent and principal strive to maximize their own utility, this will result in conflict of interests (Jensen et al. 1976). Studies on managerial compensation have generally found that company size increases manager remuneration (Jensen and Murphy 1990: Conyon and Murphy 2000). This provides management with an incentive to focus on company size growth, rather than growth in shareholder returns Managers also tend to pursue growth by diversifying, which reduces management's industry specific risk and strengthens their job security. However, Lang and Stulz (1994) find that shareholder returns are greater in undiversified companies and they also show that the value of the companies is reduced as they diversify further. Read the passage 2 carefully and answer the following questions. Question 1: Define conflict of interest. Give four examples of conflict of interest situations. Question 2. How a conflict of interest arises between managers and shareholders of a company