NOCLAR

NOCLAR

Responding to non compliance with laws and regulations

Responding to non-compliance with laws and regulations (NOCLAR) | ACCA Global

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NOCLAR

Quick Quiz

Multiple Choice

What is the purpose of the technical article - Responding to non compliance with laws and regulations?

• Provide detailed responsibilities to auditors to avoid any NOCLAR

• Provide guidance to auditors in addressing non compliance or suspected NOCLAR

• Provide rights to auditors to override the duty of confidentiality in any NOCLAR

Introduction

The International Ethics Standards Board (IESBA) issued their final pronouncement on Responding to Non-Compliance with Laws and Regulations (NOCLAR) in July 2016.

The new standard adds sections 225 and 360 to the IESBA’s Code of Ethics for Professional Accountants.

The purpose of the new sections is to address the responsibilities of Professional Accountants in Public Practice (inclduding auditors) and Professional Accountants in Business when they become aware of NOCLAR.

What is NOCLAR?

• NOCLAR is defined as acts of omission or commission, intentional or unintentional, committed by a client, or by those charged with governance, by management or by other individuals working for or under the direction of a client which are contrary to the prevailing laws and regulations.

• The non-compliance which the standard addresses is concerned with laws and regulations which are generally recognised to have a direct effect on the determination of material amounts and disclosures in the client’s financial statements.

What is NOCLAR?

• It also addresses other laws and regulations which may be fundamental to the operating aspects of the client’s business, to its ability to continue its business or to avoid material penalties.

• It is worth noting that the standard does not include within its scope any matters that are clearly inconsequential or any personal misconduct which is unrelated to the business activities of the client or employer.

NOCLAR

Quick Quiz

Multiple Choice

Which of the following is NOT within the scope of NOCLAR?

• Operating license not renewed on timely basis.

• Non compliance with the local health & safety regulations.

• Unfair dismissal of employees at work place.

• Director making false representation on an upcoming project.

Background and aims

• The NOCLAR project originated from an attempt to address concerns from the regulatory community and other stakeholders that the Professional Accountant’s (PA’s) duty of confidentiality under the Code, was acting as a barrier to the disclosure of possible NOCLAR to appropriate public authorities.

• The existing Code acknowledged that this is a difficult area to decide on and that as a result, it will often be appropriate to take legal advice.

Background and aims

• The new standard aims to raise the ethical bar for the global accountancy profession and to increase the emphasis on PAs’ duties and responsibilities in this area.

• It importantly represents the first time that accountants have been permitted to set aside the duty of confidentiality, which is a fundamental principle in the Code, in order to disclose NOCLAR to appropriate public authorities in the circumstances prescribed. 

Background and aims

• The most significant revisions have been to ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements which now directly references the Code and the additional responsibilities under law, regulation or relevant ethical requirements regarding an entity’s non-compliance with laws and regulations. It acknowledges that these may differ from or go beyond the ISA itself.

• Concerns were also expressed that auditors were simply resigning from client relationships as a result of suspected or identified NOCLAR without the matter being appropriately addressed.

Background and aims

• Moreover, it was felt that there was a lack of guidance in the Code about the thought process and the relevant factors to consider in determining how best to respond to potential NOCLAR in the public interest.

• While the existing Code implicitly required PAs not to turn a blind eye to potential NOCLAR, there were no clear and explicit requirements on how to respond. There was a risk that the duty of confidentiality would put PAs in a conflict situation and confuse their response.

Background and aims

• The NOCLAR guidance therefore aims to ensure that PAs respond to identified or suspected NOCLAR on a timely basis in order to rectify, remediate or mitigate its potentially adverse impact on stakeholders and the general public.

• The increased emphasis on PAs’ duties and responsibilities in this area should also serve to stimulate increased reporting of NOCLAR and even to act as a deterrent to non-compliance by audited entities.

• NOCLAR now enables PAs to override their duty of confidentiality where there is a strong public interest in the matter.

NOCLAR

Quick Quiz

Multiple Choice

What further steps may auditors take should matters relating to NOCLAR is ambiguous?

• To turn a blind eyes to the situation

• To seek legal opinion or advice

• To resign from current engagement

• To report to relevant authority

Multiple Select

What are the various objectives and aims by the IESBA in issuing the NOCLAR statement of guidance?

• To stimulate the reporting of NOCLAR by PAs

• To mitigate adverse impact of NOCLAR on general public

• To protect the interest of the stakeholders of client

• To enable PAs to override their duties of confidentiality

• To act as a deterrent to NOCLAR by client

Multiple Choice

Should governments introduce and strengthen legislation in addressing NOCLAR - it will provide protection for whistle blowers and to auditors and other PAs who implement the standard.

• YES

• NO

Responsibilities of auditors

The NOCLAR guidance provides a clear framework for auditors to follow when addressing an instance of non-compliance or suspected non-compliance.

_{1.    Obtaining an understanding of the matter}

_{2.    Addressing the matter}

_{3.    Communication with respect to groups}

_{4.    Determining whether further action is needed}

_{5.    Determining whether to disclose the matter to an appropriate authority}

_{6.    Documentation}

_{Obtaining an understanding of the matter}

-The first step - auditor should obtain a full and clear understanding of the matter including the nature of the act and the circumstances in which it has occurred.

-An auditor has always been required to obtain a good understanding of the environment in which a client operates including any relevant laws and regulations. 

-the auditor is expected to apply their knowledge, professional judgement and expertise but they are not expected to have a knowledge of laws and regulations that is greater than that which is required

_{Obtaining an understanding of the matter}

-to consider consulting with other members of the firm, with a network firm or relevant professional body (confidential basis).

-consider taking legal advice. 

-discuss the matter with the appropriate level of management

-to clarify understanding of the facts and circumstances surrounding the matter & potential consequences.

-to consider any potential involvement or collusion in the matter & the ability of management to carry out investigations and take appropriate action.

_{Addressing the matter}

-the auditor should advise them to take timely and appropriate actions in order to resolve the situation, to deter possible non-compliance or to disclose the matter to an appropriate authority where it is required by law or regulation or it is considered necessary in the public interest.

-auditor must also ensure own compliance with laws and regulations together with the requirements under auditing standards including, :

_{~Identifying and responding to non-compliance, including fraud.}

_{~Communicating with those charged with governance.}

_{~Considering the implications on the auditor’s report.}

Communication with respect to groups

In the context of a group audit, the auditor should consider their responsibilities to report instances of non-compliance or suspected non-compliance to the group engagement partner unless prohibited from doing so by law or regulation.

_{Determining whether further action is needed}

-The auditor should assess the appropriateness and effectiveness of the response of management and TCWG to the matter, including the timeliness of the response and the extent of investigation and remedial action.

-Where the auditor decides that further action is necessary - for example, disclosing the matter directly to the appropriate authority and withdrawing from the engagement.

-Following withdrawal, the outgoing auditor is required to co-operate with the proposed successor auditor.

_{Determining disclosure to appropriate authority}

-The determination of whether to disclose the identified or suspected non-compliance to an appropriate authority - depends on the nature and extent of the actual or potential harm which might be caused to investors, creditors, employees or the general public.

-The decision to disclose will always be a matter for the auditor’s judgement and where the disclosure is made in good faith, it will not constitute a breach of the duty of confidentiality.

-This should also help to resolve the potential conflict for the auditor between their ethical duty of confidentiality and their professional duty of disclosure in the public interest.

Documentation

The auditor is required to document the process of compliance with the NOCLAR guidance including the response of management and those charged with governance, the courses of action considered, the judgements made and the decisions taken.

NOCLAR

Quick Quiz

Multiple Choice

Addressing the matters - auditor advise client to take timely and appropriate actions to resolve the situation, to deter possible non-compliance and to disclose the matter to an appropriate authority as required by law or regulation or considered necessary in the public interest.

• True

• False

Multiple Choice

In the context of a group audit, the auditor should consider their responsibilities to report instances of non-compliance or suspected non-compliance to the _________________unless prohibited from doing so by law or regulation.

• group audit committee

• group engagement partner

• group component auditor

Multiple Choice

The auditor should assess the appropriateness and effectiveness of the response of management and TCWG to the matter, including the timeliness of the response and the extent of investigation and remedial action in deciding any further actions are necessary.

• True

• False

Multiple Choice

Would auditors withdrawing from the engagement as a results of unresolved NOCLAR issues have further responsibilities?

• Yes

• No

Multiple Choice

Disclosures made in good faith, will not constitute a breach of the duty of confidentiality.

• True

• False

Multiple Choice

Auditors ethical duty of confidentiality overrides their professional duty of disclosure in the public interest.

• True

• False

Multiple Choice

Auditors ethical duty of confidentiality overrides their professional duty of disclosure in the public interest.

• True

• False

Multiple Select

With reference to NOCLAR framework - what are expected to be documented?

• Decisions taken

• Responses of management

• Courses of action considered

• Justification of judgments made

• Actions taken

The need for support

The IESBA acknowledges that the accountancy and auditing profession will not resolve the NOCLAR issue in isolation and that it requires the support and co-operation of other professions together with governments, legislators and regulators.

In particular it is hoped that governments will introduce and strengthen legislation addressing NOCLAR and will provide protection for whistle blowers and to auditors and other PAs who implement the standard.

Conclusion

In practice auditors will often have to deal with instances of non-compliance with laws and regulations, and the IESBA’s NOCLAR standard provides important additional guidance and clarification of their duties and responsibilities in this key area.

End of session

Thank you.