Roundtable Favors Changes to Ethics Code for Accountants to Allow Reporting of Illegal Acts
The majority of attendees at a roundtable discussion Thursday in Washington, D.C., on enhancing the ethics standards for accountants favored changes by the International Ethics Standards Board of Accountants to permit reporting of illegal acts.
However, consensus remained elusive regarding the threshold question of who should be informed of suspected misconduct before external reporting is authorized.
The roundtable was the final one of three organized by the IESBA, which operates under the auspices of the International Federation of Accountants, to solicit feedback on revisions to the Code of Ethics of Professional Accountants. The previous roundtables occurred in Hong Kong on May 20 and Brussels on June 13.
The revised ethics code would balance the duty of client confidentiality with the public interest in disclosure of illegal acts. The need to maintain public confidence in the business world and investor concerns over violations by companies like BNP Paribas, the French bank that was fined $8.9 billion for violating U.S. sanctions earlier this month, are driving the changes.
After publishing an exposure draft on the proposed changes in August 2012, the IESBA received more than 70 comment letters from stakeholders. The feedback led the organization to make a number of modifications to the proposed rules.
The IESBA dropped the requirement for mandatory reporting of suspected non-compliance to the authorities or an external auditor. Instead, accountants would be required to obtain an understanding of the matter and then consider if disclosure is in the public interest.
The most recent proposal would also allow accountants to report on matters outside their expertise and use the internal reporting mechanisms developed by the client or employer’s compliance department rather than the originally proposed up-the-ladder reporting.
“In the distant future, it seems likely accountants will be required to report externally to regulators when they discover violations of the law that go unreported by a client,” said Eric L. Young, managing partner of Young Law Group, a Philadelphia law firm representing whistleblowers. “Right now, when legal protections in many countries are limited or nonexistent, it would be irresponsible. The proposed changes are a solid first step to provide ethical support to professionals who feel compelled to protect the public from corporate wrongdoing.”
The IESBA sought the advice of participants at the roundtable on issues ranging from when the accountant should disclose, who inside the company should be notified and whether the approach should vary for different classes of professional accountants and types of suspected noncompliance with laws and regulations. The morning breakout sessions elicited a wide range of viewpoints on the appropriate ethical response of an accountant to various hypotheticals.
One session considered the actions that should be taken by an auditor who discovers conduct immaterial to the financial statement but important to regulators, such as a sale to Iran of a cheap component used in nuclear devices. Another case study asked participants to place colored post it notes next to the appropriate professionals and organizations, if any, the accountant should report to because of the discovery.
The IESBA initiated the project because of regulatory concerns that its ethics code inhibits whistleblowing when an accountant suspects non-compliance with laws and regulations. The current confidentiality provisions only permit disclosure when it is authorized by the employer, required by law, or when there is a professional duty or right to disclose.
Since Enron, Congress has taken aim at financial fraud and encouraged reporting of illegal acts. Congress included measures to protect professionals from retaliation for reporting suspected violations in both the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. It also expanded on the success of the False Claims Act, authorizing mandatory rewards to whistleblowers who report tax evasion to the Internal Revenue Service and securities fraud to the Securities and Exchange Commission.
The importance of accountants to law enforcement was recently acknowledged by the Supreme Court in Lawson v. FMR LLC, where it extended SOX retaliation protections to private contractors. An accountant was also the first whistleblower to receive a payment from the IRS Whistleblower Office under Section 7623(b) of the Internal Revenue Code.
The ethical dilemma is not limited to accountants in the United States. The Foreign Corrupt Practices Act extends to companies listed on a stock exchange in the United States regardless of their location. Canada implemented its Offshore Tax Informant Program to reward informants about tax evasion. Additionally, the United Kingdom and Australia are considering measures to pay whistleblowers as well.
The IESBA will process the feedback from the roundtables and discuss the project at its October 2014 meeting. A revised exposure draft is anticipated at the January 2015 meeting. The changes to the ethics code should be complete in the first quarter of 2016.