While many may envision accountants sitting behind computers with spreadsheets and pencils, their unique position often places them as guardians of the public interest. Professional accountants may be the first to find evidence of possible fraud, health and safety violations, or corruption, which brings us to the latest buzz word in the profession - NOCLAR.
Quite simply it stands for non-compliance with laws and regulations. The International Ethics Standards Board for Accountants (IESBA) defines NOCLAR as, "any act of omission or commission, intentional or unintentional, committed by a client or employer, including by management or by others working for or under the direction of the client or employer, which is contrary to prevailing laws or regulations."
So, why the buzz?
In 2016, following a 6-year project, the IESBA released a new framework for professional accountants in cases of suspected NOCLAR. Essentially, it is a guide for accountants to follow when they suspect something is amiss – protecting both the accountant and the public interest. The new standard came into effect in July 2017, which means professional accountants need to understand their role and duty in reporting NOCLAR, and the international standards available for guidance.
Two International Federation of Accountants (IFAC) boards were responsible for establishing professional standards in relation to NOCLAR. The NOCLAR project started with the IESBA and was closely followed by the International Auditing and Assurance Standards Board (IAASB) which would need to make adjustments as necessary to ensure International Standards on Auditing (ISAs) were in-line with any new ethics standards created. IFAC describes the IESBA as, "an independent standard-setting board that develops and issues high-quality ethical standards and other pronouncements for professional accountants worldwide," and IAASB as, "setting high-quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation."
The IESBA's NOCLAR project started in 2010 based on concerns over the lack of standards for determining and reporting suspected NOCLAR. The IAASB officially launched its project in June 2015 to, "address actual or perceived inconsistencies of the approach to identifying and dealing with instances of identified or suspected NOCLAR in complying with ISA 250 and other International Standards when the IESBA Code also applies." Both projects included a number of exposure drafts, comment periods and collation of feedback from IFAC members before final pronouncements were made.
THE NEW CODE
The new framework is found in the Code of Ethics for Professional Accountants (the Code) 2016 edition. At a high level, the Code covers five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour (IESBA Fact Sheet).
The specific sections of the code addressing NOCLAR are 225 and 360, with additional changes made to sections 100, 140, 150, 210 and 270.
Section 225 speaks specifically to professional accountants in public practice and is broken into two main areas: the first in relation to audits on financial statements, the second in relation to professional services other than audits on financial statements.
Both areas outline responsibilities of the professional accountant as well as the client's management team. Section 360 speaks to professional accountants in business, and outlines responsibilities of the professional accountant in business as well as the responsibilities of the employing organisation's management and governance teams. While key determinations are left to the accountant's professional judgement, the sections do provide factors to consider to assist in determining what action, if any, needs to be taken.
The key areas addressed in both sections include:
- Obtaining an understanding of the matter
- Addressing the matter
- Determining whether further action is needed
- Communicating the matter to the entity's external auditor (where applicable)
CHANGES TO ISAs
As already discussed, the IAASB project looked specifically at ISA 250 and any other international standards potentially impacted by changes to the IESBA Code. Changes to ISA 250 include adopting some of the language in section 225 of the Code, and changing references to "implications of" or "instances of non-compliance" to include "identified or suspected non-compliance". Additional ISAs amended include 210, 240, and 220, with revisions also being made to ISAE 3000, ISRS 4410, ISRE 2400, and ISAE 3402.
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