Responding to Suspected
Illegal Acts
Robert Franchini
New York, March 2013
Page 1 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Summary of Responses
Overall Support?
Category of Respondent
IFAC Member Bodies
Yes
Part Support/
Concerns
7
3
Firms
Regulators and Public Authorities
1
3
National Standard Setters
Other Professional organizations
4
Individuals & Others
1
Total
9
10
No
Total
23
33
12
12
1
5
3
3
14
18
1
2
54
73
Page 2 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Summary of Responses
• Pivotal issues:
– Requirement for auditor to disclose to an appropriate authority
– Requirement to disclose to external auditor for PAIB and PA performing
non-assurance services to non-audit clients
– Right with expectation to disclose to an appropriate authority for PAIB
and PA performing non-assurance services to non-audit clients
• Resolution of secondary issues will depend on how pivotal
issues are addressed
• Regulators were supportive but raised concerns about the
direction of the project
• However: almost all respondents were supportive of the
IESBA tackling the subject of illegal acts
Page 3 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Pivotal Issues Raised by Respondents
Requirement for auditor to disclose to an appropriate
authority
–
–
–
–
Purview of national regulators and lawmakers
Potential conflicts with local regulations
Disproportionate to require without legal protections
Does not consider authority’s ability to intake and process such
disclosures
– Will fundamentally impact “PA-Client” relationship
– Primary responsibility for reporting lies with management and TCWG
– Could create conflicts:
• PAs that are also lawyers
• Lawyers that practice within an accounting network
• In services being provided by PAs under legal privilege
– Reference made to OECD anti-bribery recommendations of 2009
Page 4 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Pivotal Issues Raised by Respondents
Requirement for auditor to disclose to an appropriate
authority
Alternative suggestions
– Most respondents were supportive of providing guidance that would help
PAs address SIAs
– A number of respondents supported the concept that the auditor be
permitted to disclose in certain circumstances
– Some respondents suggested the IESBA and IFAC engage with
governments and regulators through the G20 and IOSCO to explore
global principles for reporting of illegal acts (similar to AML)
Page 5 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Pivotal Issues Raised by Respondents
• Requirement for other PAs to disclose to the external
auditor
– Receiving such disclosures is the role of management and TCWG and not
the external auditor
– Conflicts with legal and confidentiality requirements
– Companies may be discouraged from engaging PAs to perform forensic
accounting, due diligence and services performed under attorney-client
privilege
– Unclear external auditors’ responsibilities with respect to such disclosures
– Auditor forced to deal with vexatious reports or reports unrelated to audit
Alternative suggestions
– A number of respondents considered such a disclosure as an option that
was available to other PAs faced with an SIA rather than a requirement
Page 6 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Pivotal Issues Raised by Respondents
• Right with expectation for other PAs to disclose to an
appropriate authority
– Right + expectation = De facto requirement
– Purview of national regulators and lawmakers
– A professional code cannot provide for a “right” that overrides statutory
and regulatory confidentiality
Alternative suggestions
– Many supported simply a “right” or being “permitted “ to disclose without
the expectation to exercise
Page 7 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
IOSCO – Key Comments
• Support for better guidance in Code
• Redeliberate to a proper balance between what PA is called upon and
allowed to do with respect to SIAs
• Does not consider authority’s ability to intake and process such
disclosures
• Confirms need to address PAs other than auditors
• Reconsider:
–
–
–
–
Types of illegal acts to be covered by the proposals
Responsibilities of management and TCWG
Responsibilities of auditor where there is disagreement with client
Establish illegal acts which call for steps incremental to ISAs
• Interaction with IAASB and its project of auditor communications
• Offer to discuss experiences with individual IOSCO members
Page 8 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Discussion
To continue or not to continue?
Page 9 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Discussion
Requirement for auditor to disclose to an appropriate
authority
Requirement to disclose to external auditor for PAIB and PA
performing non-assurance services to non-audit clients
Right with expectation to disclose to an appropriate
authority for PAIB and PA performing non-assurance
services to non-audit clients
Page 10 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Secondary Issues
• Requirement to confirm or dispel the suspicion
– Many were supportive but recognized practical challenges
– Many were opposed due to perceived constraints:
• Is suspicion the right threshold?
• Meaning of “reasonable steps”, “suspicion” and “suspected illegal act”
• Lack of expertise of PA to determine what is illegal
• Non-auditors may not have means or authority to investigate
• Requirements and responsibilities should be clear for enforceablity
• Conflict with AML requirements re “tipping-off”
• In essence it is overly prescriptive
Alternative suggestions
– ISA 250 already establishes a process for auditor
– PA should be permitted to use more judgment
– Alternative to “suspected” illegal act, such as “likely”
Page 11 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Secondary Issues
• Public interest test and escalation threshold
– Many were supportive of the concept of this threshold but some expressed
concern about the lack of definition of the term
– Many respondents were opposed to this threshold due to the lack of
objectivity and scope for inconsistent application
– IOSCO suggested that it would be in the public interest that any violation
should be subject to appropriate handling
– Many respondents were concerned that the process seemed to call for
escalation of insignificant matters (particularly onerous for SMPs)
Alternative suggestions
– Threshold based on materiality
– Develop guidance around the meaning of public interest
Page 12 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Secondary Issues
• Types of SIAs to be disclosed
– ED: Matters to be disclosed are those pertaining to financial reporting or
those in the expertise of the accountant (or subject matter of NAS)
– Opinions were split with majority of respondents expressing opposition
and a significant minority were supportive
– Those expressing opposition did so because they believed that the subject
of illegal acts reporting was the purview of national regulators
– IOSCO suggested, as did some other respondents, that it would be in the
public interest that any violation should be subject to appropriate handling
• Interaction with ISAs
– Proposals appear to go beyond existing ISAs 240 and 250
– Comments from regulators:
• The proposals should be consistent with the ISAs
• IESBA should coordinate its project with IAASB
Page 13 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Secondary Issues
• Meaning of appropriate authority
• Difficulty on establishing who to report to
• Not all countries have an appropriate authority
• Does not consider authority’s ability to intake and process such
disclosures
Page 14 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Secondary Issues
Discussion
Page 15 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Other Issues
• Exception provision
– Many respondents did not give a view as they were opposed to reporting
requirement and, accordingly, viewed the question as irrelevant
– Many thought the provision lacked clarity
– Some thought that the circumstances should be expanded to inadequate
legal protection, liability risks, threats to personal property
• Scope of application
– PA performing non-audit services to an audit client versus to an non-audit
client
– PA performing non-audit services to non-audit client versus auditors
– Views were divided on both
• Documentation
– Many thought the requirement to document was a departure from the
existing approach of the Code
Page 16 | Confidential and Proprietary Information
Responding to Suspected Illegal Acts
Other Issues
Discussion
Page 17 | Confidential and Proprietary Information