Ethical Practice Ensures Public Confidence by Hamza Bilal

Professional accountants are expected to act in the wider

interest of the public while working both in the role of

an auditor or an employee of an organisation. Hence,

we as chartered accountants are not only expected to

be technically strong and competent but at the same time, it

is an expectation from us to reinforce ethical behaviour and

ethical decision making by our clients and employers. Ethical

practice ensures to sustain confidence of public in accountancy

profession. In order to sustain confidence of stakeholders and

avoid any disrepute to our profession, we are expected to be

fully in compliance with relevant laws and

regulations and disassociate ourselves in

scenario where there is a known or suspected

non-compliance by our employer or client and

evaluate whether disclosure of the matter to

relevant regulatory authority is required under

vast public interest.

Our Institute, The Institute of Chartered

Accountants of Pakistan (ICAP), is a member

of International Federation of Accountants

(IFAC) and adopts the comprehensive Code of

Ethics issued by International Ethics Standard

Board for Accountants (IESBA), an independent

standard setting body under the auspices of

IFAC. ICAP has adopted conceptual principalbased

approach which provides guidelines to

professional accountants to help them identify threats

to ethical behaviour, evaluate them and respond to

them in desired manner by application of adequate

safeguards to ensure confidence of a knowledgeable

independent party in independence of professional

accountant involved in the matter.

Accountants are expected to observe principles of

integrity, professional behaviour and confidentiality

while providing services. Non-Compliance with Laws

and Regulations (NOCLAR) is any act of omission or

commission whether intentional or unintentional by an employer

or a client, by those charged in governance or by management

or by employees for or under the direction or willingness of the

employer or client which is not in line with prevailing relevant

laws and regulations. NOCLAR was initiated by IESBA to address

concerns of regulatory authorities and other stakeholders that

ethical principle of confidentiality is acting as a potential barrier

to disclosure of NOCLAR where it might in fact be required to be

disclosed in vast interest of public. NOCLAR sets out criteria to

evaluate where a disclosure to an external appropriate authority

might be required in public interest. The code acknowledges

that it can be a difficult scenario for a professional accountant

to decide appropriate course of action, hence it states that

professional accountants should often consider taking legal

advice in scenarios where there is known or suspected NOCLAR.

NOCLAR became effective in July 2017. NOCLAR framework sets

out following steps to be taken by a professional accountant or

an auditor:

i. Identifying and understanding the facts involved in the

matter.

ii. Discuss the matter with management and those charged with

governance.

iii. Determine further action which might include seeking legal advice.

iv. Evaluating wether disclosure to an outside authority is

required

v. Evaluating the impact on financials, going concern and other

aspects of the company.

vi. Deciding on appropriate required action.

vii. Documentation of the matter.

The International Auditing and Assurance Standards Board

(IAASB) has approved changes recommended by this regulation

to International Standards on Auditing (ISA) 250 (Consideration

of Laws and Regulations during Audit of Financial Statements).

The changes became effective for audits of financial statements

for period beginning on or after December 15, 2017. The

objective of IAASB for NOCLAR was to identify actual or

perceived inconsistencies between NOCLAR provisions of IESBA

and ISA 250 and to bridge those inconsistencies.

ISA 250 has been specifically designed to provide guidelines

about responsibility of an auditor to consider laws and

regulations in an audit of financial statements. ISA 250 divides

laws and regulations into two types:

? Those laws and regulations that have a direct impact on amounts

reported and disclosed in financial statement of the company.

? Those laws and regulations that may have an indirect impact

on the financial statements of the company.

ISA 250 defines that it is the responsibility of the management to

develop controls to ensure compliance with laws and regulations.

The standard states that an auditor needs to evaluate the likely

impact on financial statement in case of any non-compliance

with relevant laws and regulations. As an auditor needs to give an

opinion whether financial statements are free from any material

misstatement due to fraud or error.

ISA 250 revised as a result of NOCLAR explains the audit

procedures that are required to be performed when a noncompliance

with laws and regulations is identified or suspected

which includes:

? Obtaining an understanding of the nature of the act and the

circumstances in which it has occurred and further information

to evaluate the possible effect on the financial statements.

? Discussing the matter with management and those charged with

governance and obtaining legal advice in certain circumstances.

? Evaluating the implications of NOCLAR in relation to other

aspects of the audit.

? Evaluating the impact of NOCLAR on the audit opinion.

? Determining whether to report NOCLAR to an appropriate

authority outside the entity would be in accordance of the

NOCLAR (Ethical Standard).

The work effort in ISA 250 (Revised) has not been amended.

However, the revised standard now specifically highlights possible

scenarios that may exist under law, regulation or relevant ethical

requirements in relation to reporting to an appropriate authority,

and addresses the confidentiality considerations.

Other key amendments to IAASB standards under NOCLAR were

as follows:

? ISA 210 Agreeing the Terms of Audit Engagements: More

detailed application material was added to emphasise that

the auditor should consider including in the audit engagement

letter the auditor’s responsibilities under law, regulation or

relevant ethical requirements regarding reporting of NOCLAR

to an appropriate authority.

? ISA 240 The Auditor’s Responsibilities Relating to Fraud in

an Audit of Financial Statements: Updates were made to be

consistent with changes made to ISA 250 (Revised), in particular

to address the additional responsibilities under law, regulation

or relevant ethical requirements, the communication required

with management and those charged with governance, and

requirement to identify required reporting of fraud to an

appropriate authority outside the entity.

? ISA 220 Quality Control for an Audit of Financial

Statements: Matter was added to explain in detail the

communication required between a predecessor and successor

auditor, including with respect to NOCLAR, linking it to the

provisions in the IESBA Code.

? ISAE 3000 (Revised) Assurance Engagements Other than

Audits or Reviews of Historical Financial Information

and ISRS 4410 (Revised) Compilation Engagements:

Amendments to be consistent with changes made to

ISA 250 (Revised), in particular to address the additional

responsibilities under law, regulation or relevant ethical

requirements, the communication required with management

and those charged with governance and reporting NOCLAR

to an appropriate authority outside the entity. Amendments

also made to address the practitioner’s expected level of

understanding of laws and regulations beyond the scope of

the standard.

? ISRE 2400 (Revised) Engagements to Review Historical

Financial Statements: Amendments to be consistent with

those made to ISA 250 (Revised), in particular to address the

additional responsibilities under law, regulation or relevant

ethical requirements, the communication with management

and those charged with governance and reporting NOCLAR to

an appropriate authority outside the entity.

? ISAE 3402 Assurance Reports on Controls at a Service

Organisation: New application material was added to

highlight that the auditor may communicate with third parties

when NOCLAR is identified.

Conclusion: NOCLAR will create a sense of greater accountability

among organisations and will help protect the interest of

stakeholders and general public from potential harm suffered

as a result of non-compliance with laws and regulations. The

standard will also help improve the reputation of our profession

and enable greater trust and reliability. Due to corporate

scandals, questions have been raised on the integrity and

objectivity of professional accountants which has resulted in

increased requirement for professional accountants to be ethical

and act in public interest. In order to prevent any disrepute to

our profession, we need to stay in touch and updated with ethical

requirements and expectation from us to sustain confidence of

the public in our profession.

The writer is a chartered accountant working as deputy

manager Finance at Rafhan Maize Products Company Ltd.

Faisalabad.