NOCLAR Highlight of CPT/Baruch Conference

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State Board Report

December

The global conversation about how accountants should respond to their clients’ non-compliance with laws and regulations (NOCLAR) was continued at Baruch College’s 12th Annual Audit Conference: Ensuring Integrity, co-sponsored by the NASBA Center for the Public Trust, on November 28 in New York City. Kim Gibson, head of independence for Grant Thornton International, described the NOCLAR framework developed by the International Ethics Standards Board for Accountants (IESBA), and Catherine Allen, founder of Audit Conduct and NASBA Northeast Regional Director, outlined the AICPA’s Professional Ethics Executive Committee’s (PEEC) proposed NOCLAR standard as related to the IESBA’s.

Ms. Allen pointed out that the key differences between what the two groups developed is PEEC’s places responsibilities on auditors and non-auditors, and maintains confidentiality rules as they exist in the current standards. The IESBA maintains that an accountant’s disclosure to an appropriate authority when a NOCLAR is encountered is not to be considered a breach of confidentiality. However, the IESBA standard does not say NOCLAR automatically requires an accountant to disclose, but requires the accountant to use professional judgement to consider:

1. The nature and extent of the actual/potential harm of the NOCLAR to stakeholders;
2. Whether there is an appropriate authority to intake and follow up on the information;
3. Availability of legal protection; and
4. Existence of actual or potential threats to physical safety of the professional accountant or others.

In maintaining the status quo position on confidentiality, the PEEC noted that was the position of most State Boards, Ms. Allen reported. NASBA responded to the PEEC’s proposal in May explaining: “Changes in the business and regulatory environment, as IESBA concluded, may warrant reconsideration of existing laws and, to that end, open discussion with the State Boards.” Ms. Allen told the Baruch conference that, in the months ahead, PEEC as well as the AICPA/NASBA Uniform Accountancy Act Committee are expected to reconsider the issue.

The keynote speaker at the Baruch/CPT conference was Diana Henriques, author of The Wizard of Lies: Bernie Madoff, who described how Ponzi schemes are being successfully staged by unlikely sources. “Once we trust someone, we do not see the red flags that are indicative of failure,” she warned. Ms. Henriques told the accountants in the audience, “You are our first – and perhaps our last – line of defense.” She also acknowledged that: “On Wall Street, convicted felons get warmer welcomes than whistleblowers.” Despite the potential of being shunned by colleagues, Ms. Henriques said she believes professional accountants will have the strength of character to stand up and alert the authorities when they discover an illegal scheme.

Changes in the PCAOB’s new auditor reporting standard, which will become effective on December 15, 2017 after having been approved by the Securities and Exchange Commission on October 23, were summarized for the conference by Jennifer A. Rand, Public Company Accounting Oversight Board Office of the Chief Accountant – Deputy Division Director. Although the pass/fail opinion model has been retained, the new standard gives investors more information. Key changes include the form of the auditor’s report, the addressee of the report, a statement of auditor tenure, enhancements to basic elements, and explanatory language. The new standard also provides for the communication of “critical audit matters” (CAM), but that becomes effective for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers, and for fiscal years ending on or after December 15, 2020 for audits of all other companies.

Research projects being worked on by the PCAOB are meant to determine if a new issue exists that needs to be addressed in a PCAOB standard. The four projects Ms. Rand identified were: Changes of use of data and technology in the conduct of audit; Quality control standards – including assignment and documentation of firm supervisory responsibilities; The auditor’s role regarding other information and company performance measures, including non-GAAP measures; And the auditor’s consideration of NOCLAR. Ms. Rand said that the NOCLAR is being revisited, as the PCAOB’s investor adviser group has recommended changing the PCAOB’s standard on whistleblowing.

The SEC supports the PCAOB having a research agenda, as it is good to determine if standard-setting is needed or if there may be another solution, explained Marc Panucci, Deputy Chief Accountant in the Office of the Chief Accountant at the SEC. He advised firms to start thinking about methodology changes and training their people for the implementation of CAMs.

A panel of attorneys raised the point that the inclusion of CAMs means the auditor will be making more statements– with the potential to be alleged misstatements. Claudius Modesti, director of the PCAOB’s Division of Enforcement and Investigation, assured the audience that the PCAOB is looking at reckless cases that show clear-cut egregious violations. He told the conference, if an issue is identified as a CAM, then it is surely going to be communicated to the Audit Committee, and that can help maintain a relevant market.