Project Status This is a completed project Show To provide guidance for professional accountants on how best to act in the public interest when they become aware of a suspected illegal act (or non-compliance with laws and regulations (NOCLAR)). ScopeA revision of Section 140 and the development of two new sections in Parts B and C to provide additional guidance for professional accountants in public practice and in business on how to respond in situations where they encounter a suspected fraud or illegal act. The project will focus on the actions that the professional accountant takes when encountering such a situation. It will not address actions that professional accountants should take to identify such matters. Task Force progress / Board discussions to dateAt its October 2009 meeting, the IESBA discussed a draft project proposal to develop additional guidance for professional accountants when encountering a suspected fraud or illegal act. At its March 2010 meeting, the IESBA CAG discussed the draft project proposal. CAG representatives expressed support for the IESBA commencing such a project and provided input on the scope of the project. At its September 2010 meeting, the IESBA CAG considered the project proposal and the key issues to be addressed. At its November 2010 meeting, the IESBA approved the project proposal to develop ethical guidance for professional accountants when encountering a suspected fraud or illegal act. At its February 2011 meeting, the IESBA reached the following tentative decisions:
At its March 2011 meeting, the IESBA CAG discussed a number of the Task Force’s proposals and provided input on the direction of the project. At its June 2011 meeting, the IESBA considered the Task Force’s proposals and provided input on a draft of the proposed changes to the Code. At its September 2011 meeting, the IESBA CAG further discussed issues in the project, including whether a professional accountant should have a responsibility to report externally a suspected illegal act if doing so would be in the public interest. At its October 2011 meeting, the IESBA considered an exposure drafting addressing ethical guidance for professional accountants in public practice and business when encountering a suspected illegal act. The IESBA discussed the following matters:
At its February 2012 meeting, the IESBA discussed the position to be taken in an Exposure Draft. The IESBA agreed that:
At its March 2012 meeting, the IESBA CAG discussed the proposed position regarding the steps a professional accountant should take to respond to a suspected illegal act. At its April 2012 teleconference, the IESBA:
At its June 2012 meeting, the IESBA approved an exposure draft (ED). The ED proposed that:
The ED was issued in August 2012 and the comment period closed on December 15, 2012. At its March 2013 meeting, the IESBA considered significant comments received on the ED. The IESBA discussed three pivotal issues, namely disclosure to an appropriate authority, disclosure to the external auditor, and the right with an expectation to disclose to an appropriate authority. The IESBA also discussed a number of other issues, including; the “public interest” reporting test and the escalation threshold; the requirement to confirm or dispel the suspicion; types of suspected illegal acts to be disclosed; and the interaction of the proposed standard with the International Standards on Auditing (ISAs). At its April 2013 meeting, the IESBA CAG considered a number of key issues arising from the significant comments received on the ED. At its June 2013 meeting the IESBA considered a proposed alternative to the approach set out in the Exposure Draft, Responding to a Suspected Illegal Act, regarding a professional accountant’s responsibilities when encountering a suspected illegal act. Among other matters, the IESBA discussed the concept of a permission in the Code to override confidentiality in the circumstances set out in the proposed Section 225, Responding to a Suspected Illegal Act, applicable to professional accountants in public practice, and Section 360, Responding to a Suspected Illegal Act, applicable to professional accountants in business. It also discussed the various elements of the proposed alternative approach as well as the thresholds for actions, the types of suspected illegal acts to disclose, and documentation. At its September 2013 meeting, the IESBA considered a revised draft of a straw man of an alternative to the approach set out in the Exposure Draft, Responding to a Suspected Illegal Act, regarding a professional accountant’s responsibilities when encountering a suspected illegal act. Among other matters, the IESBA discussed and agreed to align the term “suspected illegal act” with the term “non-compliance with laws or regulations” used in the International Standards on Auditing (ISAs); it explored the possibility of establishing a presumption, which can be rebutted, that disclosure will be made under certain conditions by professional accountants for clients that are public interest entity audit clients; and it discussed documentation, changes to other sections of the Code, and communication between successor and predecessor accounting firms. At its December 2013 meeting, the IESBA considered a post-exposure draft of proposed changes to the Code regarding a professional accountant’s responsibilities relating to responding to non-compliance with laws and regulations. Among other matters, the IESBA discussed the approach to disclosure of non-compliance with laws and regulations to an appropriate authority; the application of a materiality filter when responding to such a matter; communication between a proposed accountant and an existing accountant when there is a change in professional appointment; and documentation. The IESBA agreed on a draft of the proposed changes to the Code as a basis for further consultation with key stakeholders through three roundtables to be held in Asia-Pacific, Europe and North America in Q2-Q3 2014. At its April 2014 meeting the IESBA received a brief update on recent discussions of the project with certain stakeholders, including its Consultative Advisory Group. It also received an update on preparations for its upcoming series of global roundtables on the project in Hong Kong on May 20, Brussels on June 13, and Washington DC on July 20, 2014. At its July 2014 meeting the IESBA received an update on the discussion of the project with its national standard setter liaison group on May 28 and the feedback received from stakeholders at its two global roundtables on the project in Hong Kong on May 20 and Brussels on June 13. The IESBA also was briefed on preparations for its third and final global roundtable in Washington DC on July 10. At its October 2014 meeting, the IESBA considered the feedback received from its three global roundtables on its NOCLAR project held in Hong Kong, Brussels and Washington DC in May, June and July 2014, respectively. It also considered Task Force proposals regarding a revised framework for how auditors, professional accountants in public practice providing non-assurance services (NAS), senior-level PAIBs and other PAIBs could respond to suspected NOCLAR. At its January 2015 meeting, the IESBA considered a revised draft of the proposed Sections 225 and 360 addressing responding to non-compliance or suspected NOCLAR. Topics discussed included: the scope of these Sections; the third party test regarding the need for, and nature and extent, of further action to achieve the objectives under each Section; the factors to consider in determining whether or not to disclose NOCLAR or suspected NOCLAR to an appropriate authority; a draft rationale for the proposed response framework which outlines the strengths of the framework and the main reasons for not imposing mandatory disclosure of NOCLAR or suspected NOCLAR to an appropriate authority in the Code; and illustrative examples of the application of the proposed Sections. At its April 2015 meeting, the IESBA unanimously approved for exposure revised proposals regarding professional accountants’ response to identified or suspected non-compliance with laws and regulations (NOCLAR). The revised proposals set out a new framework to guide auditors, other professional accountants in public practice, and professional accountants in business (PAIBs) in deciding how best to act in the public interest when they come across an act or suspected act of NOCLAR. At its September 2015 meeting, the IESBA received a preliminary update on significant comments from respondents to the Exposure Draft, Responding to Non-Compliance with Laws and Regulations. At its November/December 2015 meeting, the IESBA considered significant comments received on its May 2015 Exposure Draft Responding to Non-Compliance with Laws and Regulations and related Task Force proposals. The IESBA broadly supported the direction of the Task Force’s proposed revisions to the text of the Exposure Draft in the light of the feedback from respondents. Topics on which the IESBA provided input for purposes of refining the NOCLAR provisions included: communication of NOCLAR matters between component and group auditors; where withdrawal by the auditor from the client relationship is related to a NOCLAR matter, whether the auditor’s communication of the facts and circumstances concerning the instance of NOCLAR or suspected NOCLAR to the proposed auditor should be subject to the client’s consent; and where professional accountants have reason to believe an imminent breach of a law or regulation would cause actual or substantial harm to the entity’s stakeholders or the general public, whether the professional accountants would be permitted under the Code to disclose the matter to an appropriate authority without following the response framework set out in the proposed provisions. At its March 2016 meeting, the IESBA agreed in principle, subject to the deliberations of the International Auditing and Assurance Standards Board (IAASB) on related consequential and conforming amendments to IAASB standards, the final provisions in Sections 225 and 360 of the IESBA Code of Ethics for Professional Accountants (the Code) addressing the responsibilities of professional accountants in public practice and in business, respectively, to respond to NOCLAR or suspected NOCLAR. The IESBA also agreed in principle consequential and conforming changes to other sections of the Code. Topics discussed included: disclosing NOCLAR to an appropriate authority without following the specified response process; scope of matters covered by the two sections; communication with respect to group audits; documentation by professional accountants other than auditors; communication between predecessor and proposed successor auditors; and the proposed effective date of the final pronouncement. At its April 2016 teleconference, the IESBA approved the final pronouncement, including consequential and conforming amendments to a number of sections of the Code. The pronouncement is effective July 15, 2017. Early adoption is permitted. When the auditor becomes aware of or suspects noncompliance with laws and regulations?Answer: When an auditor discovers or suspects noncompliance with a law or regulation (illegal act), unless the matters involved are inconsequential, the auditor should: 1. Obtain an understanding of the nature and circumstances of the act.
When the auditor becomes aware of information concerning a possible nonWhen the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should obtain an understanding of the nature of the act and the circumstances in which it has occurred, and sufficient other information to evaluate the possible effect on the financial statements.
What happens if nonNon- compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements.
What should an auditor do when he becomes aware of information concerning an instance of non225.39 If a professional accountant engaged to provide a professional service other than an audit of financial statements becomes aware of information concerning an instance of non-compliance or suspected non-compliance, the professional accountant shall seek to obtain an understanding of the matter, including the ...
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