This happens very frequently in smaller areas. There was a situation last year I heard about where an official called a winner-to-state/loser-out playoff game where his nephew was a player at his alma mater. By some coincidence, that team won the game by a couple of points, and that official made a few questionable calls in favor of his nephew's team down the stretch. This made him look terrible personally, and made his association look poor. The sad thing is that I am sure that the district and state will consider this when future playoff and tournament allocations are made, but that means more for us!
Conflicts of interest should be avoided at all times. Films never lie, and perceptions are reality, fair or not. If in doubt, don't take the assignment. There are plenty of others!