NOCLAR Exposure Draft: NASBA Wants to Hear from Boards 

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Earlier this year, the latest efforts to address the ethical dilemma of NOCLAR (non-compliance with laws and regulations) were launched. Public discussion was encouraged regarding Communication with Predecessor Auditor Regarding Fraud and Noncompliance with Laws and Regulations. 

According to Daniel J. Dustin, NASBA Vice President, State Board Relations, NASBA’s Ethics Committee met in March to discuss the latest NOCLAR exposure draft issued by the AICPA’s Professional Ethics Executive Committee (PEEC). The AICPA Code of Professional Conduct (Code) does not currently provide specific guidance for members who encounter NOCLAR or suspected NOCLAR. The proposed interpretation sets forth a member’s responsibilities when encountering a NOCLAR event at a client or within the employing organization. According to the exposure draft, “the general objective of members who encounter a NOCLAR is to alert the appropriate parties to enable a client’s or employing organization’s management and those charged with governance to rectify the NOCLAR, mitigate the effects of the NOCLAR, or deter the commission of the NOCLAR.”  

A second NOCLAR exposure draft was issued by the Auditing Standards Board on February 25, 2021. AICPA’s Auditing Standards Board (ASB) is not proposing a revision to the existing audit requirement – that the auditor request management to authorize the predecessor auditor to respond fully to the auditor’s inquiries regarding matters that will assist the auditor in determining whether to accept the engagement. However, as an option to address NOCLAR, the ASB is proposing narrow revisions to generally accepted auditing standards (GAAS) to require an 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 and matters involving NOCLAR.  The ASB believes “the absence of authorization by management for an auditor to make inquiries of a predecessor auditor should alert the auditor to carefully consider engagement acceptance, irrespective of the basis for the lack of authorization.” According to the exposure draft, the ASB is not currently considering revisions to GAAS that would require auditors to report fraud or NOCLAR to other outside parties. 

It is anticipated that the NASBA comment letters will be submitted and shared with Boards of Accountancy by early June. Comments on the proposals are due by June 30, 2021. NASBA encourages all boards to share their comments.