How to Handle NOCLAR Debated

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State Board Report

June 2017

On July 15 the International Ethics Standards Board for Accountants’ new standard on how to respond to a client’s non-compliance with laws and regulations (NOCLAR) will go into effect in those countries that have adopted IESBA’s code. Since 2012, the AICPA/NASBA Uniform Accountancy Act Committee has tabled its discussion of NOCLAR, awaiting the outcome of IESBA’s years of consultation, and NASBA is now requesting that discussion be reopened.

The new IESBA standard marks out guidance for auditors’ and other professional accountants’ disclosure of NOCLAR to appropriate public authorities in certain circumstances. As a member of the International Federation of Accountants, the AICPA has agreed to promote the international body’s standards and the AICPA’s Professional Ethics Executive Committee in March 2017 released an exposure draft on NOCLAR for which the comment period ended on May 12. PEEC’s draft and the IESBA’s standard differ in some significant ways, most importantly when an accountant can set aside the duty of confidentiality to disclose NOCLAR to appropriate authorities. NASBA responded to PEEC’s draft (see www.nasba.org) and has requested the UAA Committee reopen its discussion to determine if the model law needs to be amended.

Responding to the PEEC exposure draft, NASBA wrote: “Overall we have significant concerns that the proposed language will effectively discourage CPAs from acting in the public interest even after care has been taken to comply with all relevant professional standards. If CPAs withhold knowledge that otherwise could have prevented or brought to light an act in a timely manner so as to prevent public harm from occurring or continuing to occur, it will not reflect well on the worth of the profession.”

The letter underscores: “It is in the public interest to communicate NOCLAR to the client’s auditor, even if the matter is not required to be communicated to regulatory authorities. Such communication is a responsibility in the public interest and should not be framed as a breach of confidentiality.”

The IESBA explains that their new standard “clarifies that turning a blind eye to potential NOCLAR is not an appropriate response from professional accountants, while placing renewed emphasis on the roles of management and those charged with governance in addressing the matter.” IESBA maintains this standard “enhances the profession’s reputation as a guardrail for trustworthy organizations and a healthy global financial system.”

Speaking at NASBA’s Western Regional Meeting, NASBA Ethics Committee Chair Janice Gray reported there are eight states that already have rules or statutes that allow NOCLAR disclosure without client consent. NASBA is recommending that UAA Section 18 be reconsidered by the joint UAA Committee, which is composed of 10 members from the AICPA and 10 members from NASBA. They would consider PEEC’s recommended interpretation as well as federal and state law and other pertinent material.