NOCLAR Exposure Drafts in February

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On January 14, 2021, the latest round in the profession’s ongoing attempt to deal with NOCLAR (non-compliance with laws and regulations) began, with the AICPA’s Auditing Standards Board’s (ASB) vote to expose for public comment a proposed Statement on Auditing Standards (SAS) on “Communication with Predecessor Auditor Regarding Fraud and Noncompliance with Laws and Regulations.” The genesis of this discussion goes back to 2012, when the International Ethics Standards Board for Accountants (IESBA) began deliberating how professional accountants can disclose potential NOCLAR situations without being constrained by the ethical duty of confidentiality. IESBA approved its NOCLAR standard in April 2016, with an effective date of July 15, 2017. Since that time countries have been adopting that standard in varying degrees.

The proposed revision to AU-C Section 210 would “require a prospective successor auditor, once management authorizes the predecessor auditor to respond to inquiries from the auditor, to inquire of the predecessor auditor regarding identified or suspected fraud or noncompliance with laws or regulation (NOCLAR).” This still does not directly address the issue of management that does not agree to such an inquiry, but the comment period is to begin by the end of February and will continue for at least 90 days. NASBA will be submitting comments on the proposal.

ASB is setting the exposure date to align with the Professional Ethics Executive Committee’s anticipated exposure of proposed revisions to the AICPA Code of Professional Conduct regarding NOCLAR. The AICPA/NASBA Uniform Accountancy Act Committee has been monitoring the development of both these proposals to determine if additional NOCLAR related changes may be required in the UAA.

J. Coalter Baker, chair of the NASBA Ethics Committee and former chair of the NASBA UAA Committee, observed: “We want to be sure that what is being proposed are meaningful changes that provide appropriate guidance for CPAs and can be enforced by the State Boards in protection of the public. IESBA Chairman Stavros Thomadakis addressed the UAA Committee in 2018 and reported the international standard allows the professional accountant to set aside confidentiality when there is a strong public interest component. Our task now is to look carefully at what is on the table and determine if it does protect the public. We don’t think CPAs are frequently encountering clients with NOCLAR issues, but for those very rare situations, we want to have something in place that enables CPAs to act without fear of being disciplined by their State Board for violating standards.