ISCA ISSUES NOCLAR EXPOSURE DRAFT FOR PUBLIC CONSULTATION
ISCA, through its Ethics Committee (EC), has issued the ISCA Exposure Draft Responding to Non-Compliance with Laws and Regulations (ISCA ED on NOCLAR Pronouncement, or ISCA ED) for public consultation. The ISCA ED is based on the final pronouncement issued by International Ethics Standards Board for Accountants (IESBA, or the Board) in July 2016 which became effective in July 2017. The effective date proposed in the ISCA ED is 1 January 2020. If the ISCA ED is adopted, ISCA’s Ethics Pronouncement 100 Code of Professional Conduct and Ethics (EP 100, or the Code) would contain new sections 225 and 360 addressing the responsibilities of professional accountants (PAs) when they become aware of NOCLAR committed by a client or employer. Consequential and conforming changes would be made to sections 100, 140, 150, 210 and 270 of EP 100.
WHY THE NEED FOR A NOCLAR PRONOUNCEMENT?
A PA’s responsibility is not exclusive to satisfying the needs of an individual client or employer. A PA has a responsibility to act in the public interest, and in doing so, shall observe and comply with the Code. Complying with the fundamental principles is the overarching objective of the Code and when encountering an act or suspected act of NOCLAR, the fundamental principles of integrity and professional behaviour need to be complied with.
A professional accountant has a responsibility to act in the public interest, and in doing so, shall observe and comply with ISCA’s Ethics Pronouncement 100 Code of Professional Conduct and Ethics.
However, the Board noted that the Code currently lacks guidance for PAs on how to respond to NOCLAR or suspected NOCLAR. Accordingly, complying with the Code as it stands will likely not assist PAs in fulfilling their responsibility to act in the public interest in such circumstances.
The NOCLAR Pronouncement provides enhancements to the Code to guide the PA in dealing with the situation and in deciding how best to act in the public interest.
ISCA’s article “Responding to Non-Compliance with Laws and Regulations” in IS Chartered Accountant Journal, October 2017, deep-dived into the requirements of the NOCLAR Pronouncement and its impact (or pain points) to PAs. This article discusses the issues relating to NOCLAR adoption which have been brought to our attention through our various outreach initiatives.
The NOCLAR Pronouncement provides enhancements to the Code to guide the professional accountant in dealing with the situation and in deciding how best to act in the public interest.
ADDRESSING THE CHALLENGES OF NOCLAR ADOPTION
ISCA has deliberated Singapore’s adoption of NOCLAR at the ISCA EC, ISCA Public Accounting Practice Committee and the Ethics Sub-Committee (EC) of the Public Accountants Oversight Committee. We have also sought feedback from small and medium-sized practices via a targeted survey. Following this, ISCA EC examined the various implementation challenges and concerns/comments raised and deliberated on how best to address them.
Below are some of the challenges raised and ISCA EC’s responses.
Q1 Laws and regulations – If there are conflicts between the requirements in the NOCLAR Pronouncement and existing legal or regulatory provisions governing how the PA should address the non-compliance or suspected non-compliance, which one should the PA comply with?
A precondition to complying with the NOCLAR Pronouncement is that PAs first observe and comply with all applicable laws and regulations, including any requirement to report the matter to an appropriate authority and any prohibition on alerting the client prior to making any disclosure, for example, pursuant to anti-money laundering legislation.
Q2 Clearly inconsequential matters – How to define if a matter is “clearly inconsequential”?
Paragraphs 225.81 and 360.8 state that “a professional accountant who encounters or is made aware of matters that are clearly inconsequential, judged by their nature and their impact, financial or otherwise, on the client, its stakeholders and the general public, is not required to comply with this section with respect to such matters.”
As the NOCLAR Pronouncement does not define or provide examples of matters which are “clearly inconsequential”, a PA should exercise professional judgement and take into account whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the PA at the time, would determine if a matter is “clearly inconsequential”.
If a PA is in doubt on whether a matter is “clearly inconsequential”, he or she should consider consulting internally with appropriate persons, for example, the professional firm’s risk management or independence partner, the company’s risk management committee or internal legal department.
If after consulting with the appropriate persons and further clarification is still needed, the PA can write to the ISCA Technical Enquiry Service for clarification and/or seek independent legal advice. Notwithstanding this, given that the consideration of NOCLAR matters would be subject to specific facts and circumstances, the final decision on whether a matter is “clearly inconsequential” and the responsibility of the decision rests with the PA.
A PA is encouraged to document the matter, the results of discussion with appropriate persons and the judgements made when concluding that the matter is clearly inconsequential, in their assessment.
Q3 What is the concept of “public interest”?
The NOCLAR Pronouncement requires PAs to act or take further action as appropriate in the “public interest”. While EP 100 and the NOCLAR Pronouncement do not define the concept of “public interest”, reference is drawn from The Institute of Chartered Accountants of Scotland Code of Ethics (ICAS) and the Public Interest Oversight Board (PIOB) which clarify the concept of “public interest” as follows:
ICAS “Acting in the public interest involves having regard to the legitimate interests of clients, government, financial institutions, employers, employees, investors, the business and financial community and others who rely upon the objectivity and integrity of the accounting profession to support the propriety and orderly functioning of commerce. This reliance imposes a public interest responsibility on the profession.”
PIOB “The accountancy profession can best contribute to the public interest by providing account-related information in which the public has confidence. This information will be most helpful if it is relevant to the users and is trusted by them as a faithful representation of the performance of the reported activities. Audits and other assurance services play an important role in meeting these criteria, by providing an objective and professional view in which users may have confidence.”
PAs can consider applying the above to enhance their understanding of the concept of “public interest”.
Q4 Change of audit appointment – Post-NOCLAR requirements
(i) Predecessor auditor
There is no change in the requirements for the predecessor auditor if the change of audit appointment is due to reasons other than NOCLAR matters such as audit tender or mandatory firm rotation. [paragraph 210.14]
If the change of audit appointment is a result of NOCLAR matters, client consent is not required for the predecessor auditor to provide information concerning the NOCLAR with the proposed successor auditor, if the disclosure is not prohibited by law or regulation. [paragraphs 210.14 and 225.31]
(ii) Proposed successor auditor
There is no change in the requirements for the proposed successor auditor. [paragraphs 225.31 and SG210.14B]
However, the proposed successor auditor is advised not to disclose, to the audit client, any information provided by the predecessor auditor in responding to the inquiry of the proposed successor auditor on whether there is any professional or other reason as to why the proposed successor auditor should not accept the appointment.
In addition, the predecessor auditor is advised to stipulate in the professional clearance letter to the proposed successor auditor that the contents of the professional clearance letter are not to be shared with the audit client.
Figure 1 Decision tree on the change of audit appointment from the perspective of predecessor auditor
Q4.1 Is withdrawal from the audit engagement the only available course of action by the auditor if there is an identified or suspected NOCLAR?
No, the auditor shall exercise professional judgement, weighing all the specific facts and circumstances available to the auditor, to determine whether withdrawal from the audit engagement is an appropriate course of action. Paragraph 225.30 also explains that withdrawal from audit engagement is not a substitute for taking other actions that are needed to achieve the auditor’s objectives under the NOCLAR Pronouncement.
Q4.2 If the change of audit appointment is a result of an identified or suspected NOCLAR matter, does the NOCLAR Pronouncement require that the client consent be obtained before the predecessor auditor can share information concerning the NOCLAR with a proposed successor auditor?
No, client consent is not required. Paragraph 225.31 states that the predecessor auditor shall share information concerning the NOCLAR with the proposed successor auditor without the client consent if the disclosure is not prohibited by law or regulation. As consideration of NOCLAR matters would be subject to different facts and circumstances, the predecessor auditor should also consider obtaining legal advice to take the appropriate course of action.
Auditors are advised to communicate their professional obligation to comply with the NOCLAR Pronouncement to their clients. They are also advised to include a clause in the audit engagement letter to make it clear that a confidentiality clause (if included in the engagement letter) would be subject to the auditors’ obligation to comply with the NOCLAR Pronouncement from 1 January 2020, regardless of the financial reporting period.
Q4.3 If the change of audit appointment is a result of an identified or suspected NOCLAR matter, would the predecessor auditor be subject to any lawsuits if he or she communicates the identified or suspected NOCLAR to the proposed successor auditor even without the client consent?
No, if the predecessor auditor provides information concerning the NOCLAR to the proposed successor auditor in the absence of malice and the disclosure is not being prohibited by law or regulation. The predecessor auditor is reasonably protected by the statutory defence under section 208(1)2 of the Companies Act and the common law defence of qualified privilege. Accordingly, the predecessor auditor has strong protection from liability in lawsuits if he or she provides relevant information without malice to the proposed successor auditor to comply with paragraph 225.31.
Q4.4 How should the predecessor auditor respond to the inquiry of the proposed successor auditor if the change of audit appointment is a result of an identified or suspected NOCLAR matter and the disclosure of such information would result in a tipping-off offence?
Tipping-off refers to the offence of disclosing any information to any person when doing so is likely to prejudice an investigation or proposed investigation under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Cap. 65A (CDSA) and Terrorism (Suppression of Financing) Act, Cap. 325 (TSFA). Accordingly, both the predecessor and proposed auditors should be mindful whenever they are disclosing information to avoid committing any tipping-off offence.
The predecessor auditor should not disclose the identified or suspected money laundering or terrorist activities to the proposed successor auditor or make other disclosures that could amount to tipping-off as the information may be discussed with the client or former client. This is to ensure that the perpetrator does not become aware that the matter has been brought to the attention of the law enforcement agencies.
As indicated in Q4.1, the predecessor auditor shall share information concerning the NOCLAR matter with the proposed successor auditor if the disclosure is not prohibited by law or regulation, for example, CDSA or TSFA.
If provision of such facts and other information relating to the non-compliance to the proposed successor auditor is prohibited by law or regulation, the predecessor auditor should inform the proposed successor auditor to perform his own risk assessment procedures. In cases of doubt, the predecessor auditor should seek legal advice to understand the professional or legal implications before responding to the proposed successor auditor.
Q4.5 What should the proposed successor auditor do if he or she does not receive a reply from the predecessor auditor to his or her inquiry on whether there are any professional reasons why he or she should not accept the appointment?
The proposed successor auditor must bear in mind that he or she should perform procedures to evaluate and conclude whether the acceptance of the new client relationship and/or audit engagement would create any threats to his or her integrity or professional behaviour. As part of the procedures, he or she shall ask the predecessor auditor whether there are any professional reasons why he or she should not accept the appointment.
As stated in paragraph 225.31, the proposed successor auditor shall perform other procedures to obtain information about the circumstances of the change of appointment if he or she is unable to communicate with the predecessor auditor. Examples of such procedures include inquiries with third parties such as legal counsel or industry peers or background investigations of management or those charged with governance via regulators’ website or general Internet search.
In addition, the proposed successor auditor should also take into consideration why he or she is unable to obtain a reply from the predecessor auditor or to communicate with the predecessor auditor when determining whether or not to accept the appointment.
Professional judgement is essential as the proposed successor auditor shall ensure that he or she is satisfied that there are no exceptional circumstances surrounding the proposed change in appointment before accepting the appointment.
Q4.6 If the change of auditor is a result of an audit tender or mandatory firm rotation and the predecessor auditor is also aware of an act or suspected act of NOCLAR, does the NOCLAR Pronouncement require the predecessor auditor to communicate information concerning the NOCLAR to a proposed auditor?
In this situation, the predecessor auditor did not withdraw from the client relationship as a result of a NOCLAR matter. Hence, client consent is required to provide facts or other information that the proposed successor auditor needs to be aware of before deciding whether to accept the audit engagement. In a situation where the information to be shared is related to a NOCLAR matter, the predecessor auditor shall share the information with the proposed successor auditor if the disclosure is not prohibited by law or regulation.
Q5 Whistle-blower protection – What are the legislations in Singapore that accord statutory protection to whistle-blowers?
The current legislations in Singapore should provide adequate protection to whistle-blowers if the PAs are to report a NOCLAR.
Section 208 of the Companies Act accords an over-arching protection to PAs. In addition, the following legislations in Singapore also offer statutory protection to whistle-blowers if the PAs are to whistle-blow on matters specified under the following acts:
- Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act
- Prevention of Corruption Act
- Workplace Safety and Health Act
- Terrorism (Suppression of Financing) Act
- Competition Act
- Penal Code
As consideration of NOCLAR matters would be subject to different facts and circumstances, the PAs should consider obtaining legal advice to understand the professional or legal implications of taking any particular course of action.
In exceptional circumstances where the protection is adjudged not to be the case, the PAs should exercise professional judgement to determine if the disclosure of the NOCLAR to an authority is an appropriate course of action.
A PA should also comply with the documentation requirements in accordance with the NOCLAR Pronouncement.
Note that the above whistle-blower protection does not accord protection for tipping-off offence. Please refer to Q1 and Q4.4 for guidance on tipping-off offence.
As consideration of NOCLAR matters would be subject to different facts and circumstances, the professional accountants should consider obtaining legal advice to understand the professional or legal implications of taking any particular course of action.
ISCA’s ED on NOCLAR Pronouncement is open for public consultation until 24 May 2019 and we welcome comments and feedback. We expect to adopt the NOCLAR Pronouncement into EP 100 in July 2019, with an effective date of 1 January 2020.
ISCA will also be holding its annual Ethics Seminar on 15 August 2019 at Carlton Hotel. We will have experts in the legal and accounting fields who will share more on the topic of NOCLAR. The registration for the Ethics Seminar will open in June 2019, so please save the date!
Lim Ju May is Deputy Director, Alice Tan is Senior Manager, and Eva Ng is Manager, Technical, ISCA.
1 Paragraphs referred to in this article are in respect of the ISCA ED on NOCLAR Pronouncement
2 Section 208 (1) of Companies Act states that an auditor shall not, in the absence of malice on his part, be liable to any action for defamation at the suit of any person in respect of any statement which he makes in the course of his duties as auditor, whether the statement is made orally or in writing.
3 If disclosure of NOCLAR matters is prohibited by law or regulation, the predecessor auditor would not need to ascertain whether client consent has been obtained as he or she might be subject to tipping-off offences by sharing such information to the proposed successor auditor. Please refer to Q4.4 for more information. In cases of doubts, he or she should seek legal advice before responding to the proposed successor auditor.