NOCLAR: Public interest and accountants

Have you met Gordon Gekko in Wall Street?

I like to start with a quote from a Hollywood blockbuster movie that was released in 1987. The movie was titled ‘Wall Street’ (part two also released later). There, Michael Douglas’s Character, Gordon Gekko at one point says: 

“I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman that greed…, for lack of a better word, …is good. Greed is right, greed works, greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

“Greed, in all of its forms… greed for life, for money, for love, knowledge… has marked the upward surge of mankind.” 

By looking at the above statement, you may feel for a moment that “greed” is good. However, I should bring it to your notice that the man who uttered the above words, i.e. Gordon Gekko, finally goes to jail for noncompliance with laws and regulations in conducting his business operations.

The spirit of the story is, too much of greed is destructive and harmful and it sometimes crosses the limits by breaking laws. 

Noncompliance with laws and regulations has been an issue across the world in promoting ethical business practices. When entrepreneur/policymaker is hit with too much of greed, the person may tend to break the law for more wealth accumulation. These could be in the forms of money laundering, bribery, corruption, terrorist financing, tax evasion, insider trading, etc. I need not to say that such non-compliances are not in the best interest of the public. 

The buck passes through the accountant

Gordon Gekko in ‘Wall Street’ plots his schemes with the assistance of other people. In other words, he uses people to his benefit by exploiting their weaknesses. On a practical note, I have seen this happening in the corporate world. During the process the accountants also falls into trouble since at one point the buck passes through the accountant. So whether the accountant likes it or not he would be privy to such non-compliances. So far a professional accountant had the opportunity to hide behind “duty of confidentiality” as per the code of ethics. However, now it is going to change. 

Responding to NOCLAR

Responding to Noncompliance with Laws and Regulations (NOCLAR) is an international ethical standard for auditors and other professional accountants. This standard has been issued by the International Ethics Standard Board for Accountants (IESBA). This is a body that operates under the supervision of the International Federation of Accountants (IFAC). 

The main task of the IESBA is to develop the code of ethics and other related standards for professional accountants and to bring in timely amendments to keep phase with the rapid changes to the profession. International recognition to a professional accounting body comes along with the IFAC membership. There are a lot of merits in having the IFAC membership. However, it is not a free ride and a member body has to abide by various rules and regulations prescribed by the IFAC and its affiliated bodies such as the IESBA. A member body is expected to take measures in adopting and implementing such regulations and standards in its local jurisdictions in a timely manner. 

Professional Accountants (PAs), who are members of the professional accountancy bodies that have got the membership with the IFAC are subjected to this new ethical standard. This is the first time accountants have been permitted to set aside the duty of confidentiality under the code in order to disclose any NOCLAR to appropriate internal and external parties including public authorities in certain circumstances. Now the professional accountants are ethically bound to follow a process when they encounter NOCLAR and can’t be charged under code of ethics for breaching duty of confidentiality. 

NOCLAR is defined as any act of omission or commission, intentional or unintentional committed by a client or employer including by management or by others working for or under the direction of the client or employer, which is contrary to prevailing laws or regulations. 

The laws and regulations covered, violations of which are acts of NOCLAR, are those that directly affect the client’s or the employing organisation’s financial statements or its business in a material or fundamental way (e.g. going concern).

The standard applies to all PAs. However, it stipulates a different, but proportionate approach for the following four categories of PAs:

 

• Auditors
• Other PAs in public practice
• PAs In Business (PAIB) who are in senior-level roles – directors, officers or senior employees in their employing organisations
• Other PAs in business

Out of the above four categories, this is something not new to the auditors, since there is an existing auditing standard which requires the auditor to consider laws and regulations in an audit of financial statements. However, with NOCLAR there are additional responsibilities that an auditor or an accountant in other public practice has to fulfil. 

In the interest of majority of professional accountants, I would like to bring it to light the process that a PA in employment at senior level should follow when encountered with NOCLAR in the work place. A PA at senior level is a person who is a director, officer, or senior employee able to exert significant influence over, and make decisions regarding, the acquisition, deployment, and control of the organisation’s human, financial, technological, physical and intangible resources.

Senior PAIBs can play an important role within their organisations in promoting an ethics-based culture, including taking appropriate steps to implement internal systems, policies, and procedures to prevent NOCLAR.

A PA at senior level should set the right tone at the top within the organisation and should establish appropriate policies and procedures to prevent NOCLAR. When encountered with NOCLAR the following process needs to be followed:

Fulfil professional responsibilities

Take appropriate steps to:

• Raise the identified or suspected NOCLAR with a superior/those charged with governance (TCWG)
• Understand and comply with applicable laws and regulations, including requirements to report the matter to an appropriate authority
• Rectify, remediate, or mitigate consequences
• Reduce the risk of re-occurrence
• Seek to deter the NOCLAR

Also determine whether disclosure to the external auditor, if any, is needed.

Determine if further action is needed

• Assess appropriateness of the response of superiors, if any, and TCWG
• In light of that response, determine objectively if further action needed in the public interest
• The nature and extent of further action needed will depend on various factors, e.g.:
• Credible evidence of substantial harm to the organisation or stakeholders
• Any law prohibiting disclosure of confidential information to an outside party

Courses of the further action may include:

• Informing management of the parent entity in the case of a member of a group
• Disclosing the matter to an appropriate authority even if not required by law
• Resigning from the employment relationship

Imminent breach

In exceptional circumstances, may immediately disclose the matter to an appropriate authority if an imminent breach of a law or regulation that would cause substantial harm to stakeholders.

A PA who is not at senior level should escalate the identified or suspected NOCLAR to immediate supervisor or use established internal whistle blowing mechanism.  

Conclusion

As a professional, you may come across many Gordon Gekkos during your professional journey. You should be smart enough to deal with them without falling into trouble. This includes your association with policymakers as well. 

Power is a temporary thing and a cycle. It just comes and goes. However, reputation is the most valuable intangible asset that any professional would possess. It should not get tainted amidst illusion of power and glory. 

Accountants are now bound by a new ethical standard to confront noncompliance with laws and regulations. He/she can’t hide behind the duty of confidentiality any longer. If the accountants are pushed to cross the limits, the process as prescribed in the NOCLAR standard may be triggered. However, it is required to review the above ethical requirement in the context of the Sri Lankan legal framework. 

This new standard would be effective w.e.f. 15 July. Finally, I recommend you to watch the movie ‘Wall Street’ to see how greed destroys men.

[The writer, FCA, CPFA (UK), ACMA, CISA, has an MBA (Finance) (Col.).]