NOCLAR: Proposals aim to help CPAs find the right balance



Identification or suspicion of a client’s or employer’s noncompliance with laws or regulations (NOCLAR) is one of the most challenging ethical issues a CPA can face, and complementary proposals issued by two AICPA committees are designed to provide clarity for these circumstances.

The AICPA Professional Ethics Executive Committee (PEEC) and the AICPA Auditing Standards Board (ASB) separately proposed standards that were created in part to bring the AICPA standards in line with those of the International Ethics Standards Board for Accountants. The PEEC proposal was drafted after consideration of responses to a 2017 exposure draft.

Comments on the proposals are due June 30.

PEEC’s ED, Responding to Noncompliance With Laws and Regulations, includes guidance for professional accountants in business as well as public accountants serving clients. The ASB’s ED would amend AU-C Section 210, Terms of Engagement, and focuses on a particular matter related to interactions between a predecessor auditor and a successor auditor.


What is NOCLAR?

PEEC’s proposed interpretation defines NOCLAR as acts of omission or commission, intentional or unintentional, committed by a client or an employer or those charged with governance, by management or other individuals working for or under the direction of the client or the employer, which are contrary to prevailing laws and regulations.

Materiality is an important trigger in the proposal, which applies to laws and regulations that relate to the determination of material amounts in disclosures and financial statements. The proposal also applies to laws that don’t have a direct effect on the material amounts and disclosures but may be fundamental to the operating aspects of the client’s business or the employer of a professional accountant in business, including its ability to continue in business or avoid material penalties.

“It’s a very carefully crafted definition intended to give guidance and to be detailed enough to provide guidance about when it applies and when it doesn’t apply,” said Bob Denham a public member of PEEC.

PEEC also was careful to define the client as the entity that engages the member, as the proposed guidance applies only to noncompliance by the client. If the client is an attorney, an underwriter, or a potential acquirer retaining the accountant to perform due diligence, the client will expect the member to owe responsibility exclusively to them.

“If accountants can’t assure that client of loyalty to them, that would put accountants at a disadvantage in providing these kinds of services, such as forensic, some kinds of tax advising, or due diligence services,” Denham said.

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Source: Journal Of Accountancy

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