20141014 IESBA - NOCLAR

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NOCLAR
Caroline Gardner, Task Force Chair
IESBA Meeting
New York
October 13-15, 2014
Page 1 | Proprietary and Copyrighted Information
NOCLAR – Recap
• 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
Page 2 | Proprietary and Copyrighted Information
NOCLAR – Recap
Tentative Board Decisions – December 2013
• 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
Page 3 | Proprietary and Copyrighted Information
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
Page 4 | Proprietary and Copyrighted Information
NOCLAR Roundtables
Jurisdictions Represented
(G-20 countries in bold)
Hong Kong
Roundtable (10)
Australia, China (mainland), Hong Kong SAR, Indonesia,
Japan, Malaysia, New Zealand, Philippines, Singapore, Taiwan
Brussels
Belgium, Denmark, France, Germany, Italy, Netherlands,
Rountdtable (12) Norway, Russian Federation, Senegal, Spain, Sweden, UK
Washington DC
Roundtable (5)
Brazil, Canada, Mexico, Pakistan, USA
Page 5 | Proprietary and Copyrighted Information
NOCLAR Roundtables
Balance of Representation
Others
Regulators/Pulic
Authorities
Preparers
TCWG/Investors
Standard
Setters
IFAC Member
Bodies
Firms
Page 6 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Overarching Themes
• 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
Page 7 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Scope – Key Concerns
• Too broad
– Any law could be relevant
– Trying to solve all problems?
• Burdening PAs with greater responsibility than anyone else?
• Legal competence?
Page 8 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Scope – Other Feedback
• 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
Page 9 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Materiality Thresholds – Key Concerns
• “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”
Page 10 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Materiality Thresholds – Suggestions Received
• 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
Page 11 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Categories of PAs – Level of Expectations
Senior
PAIBs
Auditors
NonAuditors
Other
PAIBs
Page 12 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
Categories of PAs – Other Feedback
• 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
Page 13 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
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
Page 14 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main 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?
Page 15 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
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?
Page 16 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
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
Page 17 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
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
Page 18 | Proprietary and Copyrighted Information
NOCLAR Roundtables – Main Feedback
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
Page 19 | Proprietary and Copyrighted Information
Task Force Proposals
Page 20 | Proprietary and Copyrighted Information
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
Page 21 | Proprietary and Copyrighted Information
Task Force Proposals
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
Page 22 | Proprietary and Copyrighted Information
Task Force Proposals
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
Page 23 | Proprietary and Copyrighted Information
Task Force Proposals
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?
Page 24 | Proprietary and Copyrighted Information
Task Force Proposals
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
Page 25 | Proprietary and Copyrighted Information
Task Force Proposals
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
Page 26 | Proprietary and Copyrighted Information
Task Force Proposals
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?
Page 27 | Proprietary and Copyrighted Information
Task Force Proposals
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
Page 28 | Proprietary and Copyrighted Information
Task Force Proposals
PAIBs Other Than Senior PAIBs
• Baseline actions
– Escalate to immediate superior; or
– Use established internal whistle-blowing mechanism
Page 29 | Proprietary and Copyrighted Information
Task Force Proposals
Documentation
• Required for auditors under auditing standards
• Encouraged for other PAs
Page 30 | Proprietary and Copyrighted Information
September 2014 CAG Meeting
Page 31 | Proprietary and Copyrighted Information
CAG Feedback
Main Matters Raised
• 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
Page 32 | Proprietary and Copyrighted Information
CAG Feedback
Main Matters Raised
• 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
Page 33 | Proprietary and Copyrighted Information
October 2014 Forum of Firms Meeting
Page 34 | Proprietary and Copyrighted Information
FoF Feedback
Main Matters Raised
• 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
Page 35 | Proprietary and Copyrighted Information
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 (?)
Page 36 | Proprietary and Copyrighted Information
The Ethics Board
www.ethicsboard.org
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