State Board Report
A framework for "Responding to Non-Compliance with Laws and Regulations" (NOCLAR) has been released by the International Ethics Standards Board for Accountants (IESBA), with comments due by September 4, 2015. The IESBA has been working on this topic for several years, as the current proposals are based on responses to and roundtables on the IESBA’s August 2012 exposure draft on "Responding to a Suspected Illegal Act." The proposals cover Sections 225 and 360 of the IESBA Code of Ethics for Professional Accountants and conforming amendments to other sections of that code. Since the AICPA is a member of the International Federation of Accountants (IFAC), its Code of Professional Conduct will likely be impacted by the IESBA’s code once it is finalized. The IESBA explains the objectives of the two proposed sections are to: (1) "ensure that professional accountants do not turn a blind eye to identified or suspected NOCLAR and that they do not, through their actions or inaction, bring the profession into disrepute" ; (2) alert those charged with governance to rectify or mitigate the consequences of NOCLAR or suspected NOCLAR and prevent its reoccurrence; and (3) provide guidance on "factors to consider in determining what constitutes the public interest in the context of responding to identified or suspected NOCLAR."
In determining whether to disclose a matter to an appropriate authority, the exposure draft states: "If the auditor were to determine that disclosure to an appropriate authority would be the right course of action in the circumstances even though not required by law or regulation, the Code would allow them to do so under the general permission granted under Section 140 of the Code. Under that Section, professional accountants have a right to disclose confidential information to comply with ethics standards. For the avoidance of doubt, the Board proposes that the specific application of this general permission be made clear in paragraph 225.29, i.e., that such disclosure will not be considered a breach of the duty of confidentiality under the Code."
To set a threshold for determining when disclosing a matter to an appropriate authority is required, the IESBA looked at the approach taken by the U.S. Securities and Exchange Commission in its regulation governing the obligations of attorneys who learn of client misconduct. According to the SEC’s Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission in the Representation of an Issuer, confidential information can be revealed to the Commission: "To rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury to the financial interest or property of the issuer or investors in the furtherance of which the attorney’s services were used." The IESBA decided to use "substantial injury" as their threshold as well.
The IESBA intends to finalize the NOCLAR proposals by the first half of 2016. NASBA will be submitting comments on the exposure draft by September 4.
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