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New international ethics standard will have implications for all professional accountants

Learn how the IESBA’s new standard defines the steps accountants can take when they become aware of an illegal act – underscoring the global profession’s role in the fight against financial fraud, money laundering and corruption.

The International Ethics Standards Board for Accountants (IESBA) has passed a new standard that sets out a first-of-its-kind framework to guide professional accountants on what actions to take in the public interest when they become aware of a potential illegal act. The IESBA standard is effective July 15, 2017, and early adoption is permitted.

The standard for non-compliance with laws and regulations (NOCLAR) applies when accountants are providing a professional service to their clients or are carrying out their duties for their employer. It includes a clear pathway to disclosure of NOCLAR to appropriate public authorities in certain circumstances, such as when the matter can’t be resolved through other means.

IESBA is one of the standard-setting boards of the International Federation of Accountants (IFAC). As a member of IFAC, the Canadian CPA profession must ensure its ethical standards meet or exceed the international standards set by IESBA unless there is a legal, regulatory or public interest reason to not do so. The Public Trust Committee (PTC) of Canada’s CPA profession is currently considering the NOCLAR changes in the IESBA code in relation to the CPA profession’s existing ethical standards and within the context of Canadian laws, regulations and the public interest. Finally, since regulation of the profession in Canada is a provincial responsibility, the provincial CPA bodies will need to adopt any such changes to their Code of Professional Conduct.

Addressing concerns of stakeholders

The NOCLAR project was started to address concerns from the regulatory community and other stakeholders about:

  • the duty of confidentiality under the Code acting as a barrier to timely disclosure, by auditors, of fraud and other NOCLAR to regulatory and enforcement authorities in the public interest
  • auditors simply resigning from the client relationship because of identified or suspected NOCLAR without the matter being appropriately addressed
  • a lack of guidance in the Code about the thought process and relevant factors to take into account in determining an appropriate course of action in responding to the matter in the public interest

The scope of the project was subsequently broadened to cover not just auditors but also other professional accountants in public practice and business since all professional accountants can be exposed to NOCLAR and are responsible for protecting the public interest.

The new standard represents an important and positive change for the profession worldwide. It will stimulate greater accountability among organizations and help protect stakeholders and the general public from substantial harm resulting from the violation of laws and regulations. Fundamentally, it will deter NOCLAR and increase reporting of it when it occurs.

It will also enhance the ability of the profession to act in the public interest. This is the first time accountants have been permitted to set aside the duty of confidentiality under the Code in order to disclose NOCLAR to appropriate public authorities in certain circumstances. Canadian Auditing Standard (CAS) 250 has been updated to acknowledge the new IESBA standard.

The development of the standard took more than six years and was informed by research and extensive public consultation and stakeholder outreach. Here in Canada, the PTC carefully considered and responded to the two exposure drafts that were issued and participated in a number of meetings between the IESBA and national standard-setters over the course of the project.

What is considered NOCLAR?

Any act of omission or commission, whether intentional or unintentional, that is contrary to the prevailing laws or regulations are considered NOCLAR under the framework. This includes such acts committed by a client or employer, those charged with governance, management or other individuals working for or under the direction of a client or employer. The new standard applies to laws and regulations related to the professional accountants’ training and expertise, such as:

  • laws and regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements
  • other laws and regulations, compliance with which may be fundamental to the entity’s business and operations, or to avoid material penalties

Matters outside the scope of the framework are also identified in the standard. These include:

  • matters that are clearly inconsequential
  • personal misconduct unrelated to the business activities of the client or employer
  • non-compliance other than by the client or employer, those in governance roles, management or other individuals working for or under the direction of the client or employer

Not a "one size fits all" approach

The standard applies to all professional accountants. However, it stipulates a different but proportionate approach for the following four categories of professional accountants:

  • auditors
  • other professional accountants in public practice
  • professional accountants in business who are in senior-level roles—directors, officers or senior employees in their employing organizations
  • other professional accountants in business

Those with whom professional accountants may raise NOCLAR matters will also be directly affected—including those in management positions or on boards of directors, and regulators or other public authorities.

This approach recognizes the different remits of the different categories of professional accountants, the different spheres of influence, the different levels of authority, responsibility and decision making, and the different levels of public expectations.

All professions have a role to play

Protection of the public interest is the mandate of all self-regulating professions. This new standard positions the accounting profession to play a greater role in the global fight against NOCLAR, in areas such as financial fraud, money laundering, and corruption.

The IESBA encourages all professions to reflect on this new standard of ethical conduct for the accounting profession and consider working toward a similarly global standard of ethics for their members in the public interest.

As well, all links in the financial reporting supply chain, especially management and those charged with governance, have an important role to play in preventing and bringing to light potential acts of NOCLAR.

Governments, legislators and regulators are uniquely placed to introduce or strengthen legislation or regulation governing the reporting of NOCLAR, tailored to their national circumstances, including establishing the appropriate protections for whistle-blowers. In this regard, CPA Canada can play a role in advising these groups on how to address such matters.

Over the coming months, the Canadian accounting profession will also step up to the challenge of reviewing its codes of ethics in light of the IESBA’s new NOCLAR standard.