Page 1 | Proprietary and Copyrighted Information NOCLAR Caroline Gardner, Task Force Chair IESBA...

| Proprietary and Copyrighted Information

NOCLAR

Caroline Gardner, Task Force Chair

IESBA Meeting

New York

October 13-15, 2014


• Key project objective

– To create framework to guide professional accountants (PAs) in deciding how best to serve public interest when they come across suspected NOCLAR

• Balancing acting in public interest vs. confidentiality principle

• Debate is about what is reasonable to ask of PAs within their role in the public interest

• See Supplement to Agenda Item 6 – original ED vs. proposed revised framework

NOCLAR – Recap


• A right (vs. a duty) to override confidentiality to serve the public interest

• A less prescriptive approach to the guidance

• No limitation on the type of reportable non-compliance

• Two separate thresholds for actions– Understand the matter if it is other than clearly inconsequential

– Evaluate the client’s response if the matter could have significant consequences for the client or others

• Communication between successor and predecessor auditors

Tentative Board Decisions – December 2013

NOCLAR – Recap


NOCLAR Roundtables

• Hong Kong (May 20), Brussels (June 13), Washington DC (July 10)

• Over 160 senior-level participants from wide range of stakeholder groups

• Observers:

– PIOB members and staff

– IESBA CAG Chair

– IAASB members


Jurisdictions Represented

NOCLAR Roundtables

Hong Kong Roundtable (10)

Australia, China (mainland), Hong Kong SAR, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, Taiwan

Brussels Rountdtable (12)

Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Russian Federation, Senegal, Spain, Sweden, UK

Washington DC Roundtable (5)

Brazil, Canada, Mexico, Pakistan, USA

(G-20 countries in bold)


Balance of Representation

Regulators/Pulic Authorities

Preparers

Standard Setters

Firms

IFAC Member Bod-ies

TCWG/Investors

Others

NOCLAR Roundtables


• No support for doing nothing

• Responsibility to deal with suspected NOCLAR rests with management

– In most cases, management and TCWG will do the right thing

• Applying laws and regulations must be the starting point

– Will cover most situations

• PAs are not the police

• Application of professional judgment essential throughout the process

Overarching Themes

NOCLAR Roundtables – Main Feedback


• Too broad

– Any law could be relevant

– Trying to solve all problems?

• Burdening PAs with greater responsibility than anyone else?

• Legal competence?

Scope – Key Concerns



• Broad consensus that matter should be related to PA’s expertise

– Challenges become greater the further the suspected NOCLAR is outside PA’s expertise

• Suggestions:

– Consider hard core of issues – criminal acts?

– Distinguish between NOCLARs within PA’s expertise and other NOCLARs

– Differentiate between PIEs/non-PIEs?

• Mixed views on provision of examples

Scope – Other Feedback



• “Clearly inconsequential” threshold too low– Unnecessary diversion to pursue small matters

– Who will pay for investigation costs?

– Do not underestimate number of NOCLARs a PAIB may come across in certain roles, e.g., internal audit

– Unworkable with broad scope

• More guidance needed re “clearly inconsequential”, “significant consequences”, “gravity”

Materiality Thresholds – Key Concerns



• Introduce reasonable and informed third party test

• Consider definition of a PIE when evaluating significance

• Make threshold consistent with objective

• Introduce filter along public interest line

Materiality Thresholds – Suggestions Received



Categories of PAs – Level of Expectations


Auditors

Non-Auditors

Senior PAIBs

Other PAIBs


• Ethical principles should be the same for all PAs– But implementation can be different and must be practical

• Will depend on:– Sphere of influence

– Operating context, e.g., individual PA vs. firm

• Unbundle the different dimensions?– Different roles of PA; positions in entity’s hierarchy; public expectations

Categories of PAs – Other Feedback



• Little support for junior PAIBs to report externally

– Majority expectation of escalation to supervisor or through internal WB system

• Recognition that for PA providing NAS, easier to discuss the matter with the external auditor if both are from the same firm

• Recognize potential for non-level playing field

– PAs vs other accountants; CFOs who are PAs vs other CFOs

Categories of PAs – Other Feedback



Requirement to Report Suspected NOCLAR to an Appropriate Authority


• Support from some regulators and investors for a requirement, subject to appropriate conditions

– Public expectation for PA to report, esp. if matter is beyond reasonable doubt

– Focus should be more on auditors – demonstrate they have done something

– Requirement sets clearer expectation than a permission

– Suggesting that PA does what PA thinks is best is of little value

– Order 10A under U.S. securities regulation a powerful deterrent – a good reason for a requirement in the Code?


Requirement to Report Suspected NOCLAR to an Appropriate Authority


• Most other participants, including some regulators, believe a requirement would not be operable

– Legal framework must be starting point

– Unrealistic for reporting requirement premised on perfect world conditions

– What does protection mean?

– Trusted legal due process?

– Should the Code be used as a deterrent for management to do wrong thing?

– How to identify appropriate authority and can it act on the information?


Requirement to Report Suspected NOCLAR to an Appropriate Authority – Other Feedback


• Do not ignore that TCWG have an important role to play

• Common views that reporting would depend on legal advice

• Must consider fear of reprisal (personal safety, etc)

• Local frameworks in some jurisdictions may help, e.g. enhanced auditor reporting

• Resignation an important tool for auditors


Other Issues


• Mixed views on reporting to the external auditor

– Some views that PAs providing NAS should consider reporting to external auditor, but also concerns about auditor becoming gatekeeper

– Greater expectation of communication by PAs providing NAS when firm also is the entity’s auditor

• Some concerns about PA’s ability to evaluate response of management/TCWG

• Concerns about scoping in forensic accountants


Other Suggestions/Considerations


• Need to place greater emphasis on management doing right thing

– Including setting the right tone at the top

• Consider need for “pressure release valves”

• Consider foreseeable harm to stakeholders in determining whether to report to an appropriate authority

• Avoid making the standard overly prescriptive

• Well-being of the profession also in the public interest


Task Force Proposals


Objectives

• Establish key objectives for PA in acting in public interest:

– Comply with fundamental principles: integrity and professional behavior

– Through alerting management/TCWG, seek to:

Have NOCLAR consequences rectified, remediated or mitigated; or

Deter commission of NOCLAR

– Take further appropriate action to serve public interest



Scope

• All PAs: laws and regulations covered by ISA 250

– Those laws and regulations with direct effect on financial statements

– Other laws and regulations that may be fundamental to entity’s business and operations

• No distinction between PIEs and non-PIEs



Auditors – Requirements

• Raise with management/TCWG if not clearly inconsequential– Substantiate/dispel

– Prompt management/TCWG to rectify/remediate/mitigate consequences, stop NOCLAR, or report to appropriate authority

• Fulfill professional responsibilities: comply with laws and regulations and professional standards

• Determine if further action required to achieve objectives and serve public interest– Nature and extent of further action will depend on various factors



Auditors – Determination of Further Action

• Options for further action– Inform parent entity if applicable

– Report to appropriate authority

– Withdraw from engagement and client relationship where permitted by law

• Will depend on legal and regulatory framework• Must apply third party test

– Would 3rd party, weighing all the facts and circumstances and factors considered in determining further action, likely conclude that PA has acted appropriately in serving public interest?



Senior PAIBs

• Director, officer or employee able to exert significant influence over preparation of accounting records or financial statements or compliance with laws and regulations

• Overarching expectations

– Set right tone at the top

– Establish appropriate framework within entity to prevent NOCLAR



Senior PAIBs – Requirements

• Fulfill professional responsibilities– Raise with superior/TCWG

– Comply with laws and regulations

– Rectify/remediate/mitigate consequences

– Seek to deter commission of NOCLAR

– Alert external auditor

• Determine if further action required to achieve objectives and serve public interest– Nature and extent of further action will depend on various factors



Senior PAIBs – Determination of Further Action

• Options for further action– Inform parent entity if applicable

– Report to appropriate authority

– Resign from employment relationship

• Will depend on legal and regulatory framework• Must apply third party test

– Would 3rd party, weighing all the facts and circumstances and factors considered in determining further action, likely conclude that PA has acted appropriately in serving public interest?



PAs in Public Practice Other Than Auditors

• Actions– Discuss with appropriate level of management or TCWG

– If client also an audit client, consider informing lead audit engagement partner

• Stand back– Consider whether can remain associated with the client

– Consider whether further action required, e.g. disclosing to external auditor or appropriate authority

– Will depend on various factors



PAIBs Other Than Senior PAIBs

• Baseline actions

– Escalate to immediate superior; or

– Use established internal whistle-blowing mechanism



Documentation

• Required for auditors under auditing standards

• Encouraged for other PAs



September 2014 CAG Meeting


Main Matters Raised

CAG Feedback

• Very positive feedback on roundtables from Representatives who participated re:

– Overall planning and organization

– Diversity and caliber of participants

• Continuing support from some Representatives for a duty to report to an appropriate authority in the Code, with focus on auditors

• But support from other Representatives for revised framework


Main Matters Raised

CAG Feedback

• A recognition that even if legally required to report to appropriate authority, auditors and PAIBs are not reporting NOCLAR in practice– A view that words alone may not lead to an improved outcome, but a need to

look at broader mindset issue and education

• Some split views re whether “clearly inconsequential” threshold too low• Some support for guiding senior PAIBs to set right tone at the top and

taking steps to prevent NOCLAR• Some support for 3rd party test • A number of suggested refinements taken on board re framework


October 2014 Forum of Firms Meeting


Main Matters Raised

FoF Feedback

• Some concern about PAs providing NAS being put at a disadvantage vs non-PAs who provide similar services (non-level playing field)

• A view that it is unrealistic for the Code to impose a requirement to disclose across a wide range of laws and regulations around the world

– Belief re why Order 10A in the US works so well as a deterrent: because it is uniquely tailored to the US environment

• Some support for looking at what auditors should do in the public interest


Next Steps

Timing Action

Oct 2014 Discussion with IFIAR

Nov 2014 Discussion with EAIG

Dec 2014/ Jan 2015

CAG teleconference (?)

Jan 2015 Re-ED for Board discussion/approval (?)

The Ethics Boardwww.ethicsboard.org

http://www.ethicsboard.org/

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