Ethics Code Now Guides Accountant Whistleblowers

The International Ethics Standards Board for Accountants (IESBA) has revised the Code of Ethics for Professional Accountants to address ethical concerns about how to handle a client’s suspected non-compliance with laws and regulations (frequently referred to as “NOCLAR”). The changes to permit whistleblowing in the Ethics Code, which serve as guidance for professional accountants around the world, will be effective on July 15, 2017, although early adoption is permitted.

Before the revisions, the fundamental principal of confidentiality in the Ethics Code raised a potential ethical quandary for a professional accountant considering blowing the whistle to authorities. This duty of confidentiality to clients continued to be in force even as the United States adopted the IRS and SEC whistleblower programs to monetarily reward the disclosure of information concerning violations of the law.

Following the contribution of accounting scandals to global economic problems and the increasing government reliance on whistleblowers to alert them to non-compliance with laws, the IESBA began considering the appropriate circumstances for a professional accountant to act as a whistleblower. The changes were not without controversy, as there have been several rounds of discussions, comments and revisions since a change was first proposed in October 2009. In total, the IESBA released two Exposure Drafts for comment and held three global roundtables to discuss the significant changes with stakeholders.

Now, the revised Ethics Code recognizes the dual responsibilities of a professional accountant to act in the public interest as well as protect client confidentiality. When confronted with misconduct, professional accountants have a set of clear and straightforward procedures and considerations to help them decide whether to remain silent, report internally or notify the authorities.

The new guidelines apply to situations which may have a material impact on the company, either through material amounts and disclosures in the organization’s financial statements, or through the possibility of material penalties and other implications on its ability to continue in business. They do not cover either personal misconduct unrelated to the business or the non-compliance of third-party entities discovered during the course of an engagement.

Much of the controversy in the drafting of the Ethics Code involved the crafting of guidelines sufficient to govern the various roles and levels of professional accountants. As such, the revisions offer guidance to both those performing an audit of the financial statement and those performing other professional services, as well as different levels of experience, including senior professional accountants who face a “greater expectation” that they will protect the public interest. In order to cover the wide variety of circumstances that arise, the standards for internal reporting include guidance on who to report to (the accountant’s organization, the client’s organization, or the auditor), what level of employee is appropriate for reporting, and in the event of an unsatisfactory response, how to proceed next.

Of interest to bounty seekers, the guidance offers professional accountants two scenarios for reporting to authorities. Under exceptional circumstances, defined as the imminent breach of a law or regulation that would leave investors, creditors, employees or the general public substantially harmed, a professional accountant may immediately disclose the matter to the authorities after having considered whether it is appropriate to report it to the management or governance of the company. In other circumstances, a professional accountant who does not see an adequate response from the company’s management or governors has the option of either withdrawing from the engagement or externally reporting the matter to the authorities.

Although the Ethics Code now permits reporting in certain circumstances, the guidance explicitly recognizes that local laws and regulations may alter how a professional accountant addresses suspected violations of the laws. For example, the new rule still precludes matters from being disclosed to the authorities if it is contrary to a law or regulation in the country or local jurisdiction. In other cases, laws (such as the Sarbanes Oxley Act) may require reporting when the Ethics Code does not. Therefore, professional accountants should consult the Ethics Code when local laws do not establish a clear path.

In its adoption of the Sarbanes-Oxley Act (SOX), Congress aimed to encourage whistleblowing by accountants and other outside professionals who could act as gatekeepers against fraud. The U.S. Supreme Court explicitly recognized the importance of accountants in reporting fraud as part of Lawson v. FMR LLC , when it applied SOX’s anti-retaliation protections to employees of third-party contractors rather than read into the law a literal interpretation of the phrase employees of public companies. Let’s hope that the profession seizes on the impetus created by the IESBA Ethics Code revision to take steps around the world to protect investors and the public.

If you are an accountant considering becoming a whistleblower, please contact our office by phone at 1-800-590-4116 to discuss reporting misconduct to the authorities.

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