Whistle-blower Guidance Highlighted in IESBA Ethics Code

Nov 28, 2016

Pennsylvania CPA JournalIn July 2016, the International Ethics Standards Board for Accountants (IESBA) finalized revisions to its ethics code to permit the reporting of suspected noncompliance with laws and regulations (NOCLAR) by professional accountants. The revisions offer guidance to accountants or auditors confronted with the difficult question of whether to report a suspected violation of the law to authorities given the profession’s historic respect for confidential client information.

After seven years in development, the guidance lays out a reasonable path for auditors and accountants to follow to determine when, and to whom, they should report issues discovered in the course of an engagement.

The new IESBA code includes the following:
  • Provides for the reporting of violations of laws and regulations that are generally material to the client’s financial statements or would have a material impact on the business (such as substantial government fines).
  • Excludes the reporting of personal conduct (an employee’s nonbusiness activities) and third-party (such as a client’s vendor) noncompliance.
  • Permits the immediate disclosure, in exceptional circumstances, of an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees, or the general public.
  • Recognizes different spheres of influence by creating separate frameworks for auditors, senior-level professional accountants in business, and other professional accountants.
  • Allows consideration of whether there are adequate anti-retaliation protections to warrant whistle-blowing.
The updated IESBA code goes in effect July 15, 2017, although early adoption is allowed. The AICPA’s Professional Ethics Executive Committee is considering revisions to the AICPA Code for convergence with the IESBA pronouncements on NOCLAR. The result of this process will provide better clarity on the ethical rules within the United States.

For the moment, the IESBA ethics code will not change the rules for many here in the United States. Accountants will still be prohibited from disclosing matters to the government if contrary to a law or regulation in their jurisdiction.

A preliminary review of current state rules and regulations by an AICPA task force found that the majority of states still do not provide an exception to client confidentiality rules for whistle-blowing.

These state rules stand in conflict with recent federal efforts to enlist accountants into the battle against accounting fraud and tax evasion. Over the past decade, Congress has authorized the IRS and the Securities and Exchange Commission (SEC) to reward eligible whistle-blowers with bounties of between 10 percent and 30 percent of the government’s recovery as a result of the individual’s information. Although certain accountants may be ineligible because of the terms and conditions to establishing a claim for a reward, many are indeed eligible.

In 2011 our firm represented the first recipient of a whistle-blower award under the IRS program contained in Internal Revenue Code Section 7623(b). Our client, an accountant, reported tax evasion anonymously, and the U.S. government never concerned itself with whether local laws permitted the disclosure.

The U.S. Supreme Court recognized the importance of accountant whistle-blowers in its 2014 decision, Lawson v. FMR LLC, regarding the scope of anti-retaliation protections for contractors and subcontractors of public companies in the Sarbanes-Oxley Act. Justice Ruth Bader Ginsburg, writing for the majority, found it unbelievable that Congress, in the wake of the Enron debacle, “would exclude from whistle-blower protection countless professionals equipped to bring fraud on investors to a halt.” The same principle applies in the context of the reward programs.

Over the past decade, whistle-blowing has entered the public lexicon. In fact, the SEC recently celebrated a major milestone: it has already awarded $100 million to whistle-blowers. In the coming years, we expect the IESBA’s position to gain recognition by accountants around the world, and local rules will change in favor of whistle-blowing.

The debate will then shift to the ethics of receiving remuneration for reporting client noncompliance. As the National Association of State Boards of Accountancy wrote in a letter to the IESBA in 2015, this is a key issue that went unaddressed in IESBA’s new ethics code.

The decision to blow the whistle on wrongdoing is a personal one that involves consideration of an individual’s moral compass, the applicable ethical guidance, governing laws, and the risks of retaliation. Counsel can provide guidance to assist frequent pitfalls. Prior to embarking on this journey, please consult with a whistle-blower attorney concerning this complex subject. 

Eric L. Young, JD, is a partner and whistle-blower attorney at McEldrew Young in Philadelphia. He can be reached at eyoung@mceldrewyoung.com.
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The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.