NOCLAR: balancing the needs of clients with the greater good

How can accountants strike the right balance if they discover their client is acting illegally or against the public interest.

A new section in the Code of Ethics for accountants provides a guide on what to do if they come across a client’s non-compliance with laws and regulations (NOCLAR). Ahead of his appearance at WCOA 2018, Dr Stavros Thomadakis talks about how accountants can strike the right balance if they discover their client is acting illegally or against the public interest.

A new section in the Code of Ethics for accountants provides a guide on how to proceed if they come across a client’s non-compliance with laws and regulations (NOCLAR).

“Without this new standard, the principle of confidentiality would end up standing in the way of an accountant disclosing the matter to public authorities, no matter how important the matter is,” says Dr Stavros Thomadakis, chair of the International Ethics Standards Board for Accountants (IESBA).

“The standard seeks to clarify the cases when confidentiality should not be a barrier to disclosure and describes the process that accountants should follow when they become aware of NOCLAR by clients.”

The new standard has applied to CPA members from 1 January 2018, but has been in force in some countries, such as New Zealand, for more than a year. 

NOCLAR: it’s not the same as whistleblowing

Thomadakis, who will be speaking on the topic at the World Congress of Accountants later this year, says he’s picked up two broad misunderstandings about NOCLAR. 

“The first is that people think that it is a whistleblowing exercise – that it’s a magic button that you push the moment you become aware of NOCLAR. That is not the case. It [NOCLAR] describes a whole process that you should go through and it will depend on your judgement as a professional accountant as to how you proceed.

“The other is that the standard mandates public disclosure to a public authority. It doesn’t. It just gives accountants the right to disclose NOCLAR based on his or her judgement. It’s not an obligation.”

Related: Why you can’t turn a blind eye to non-compliance by a client

Thomadakis says NOCLAR can be small and inconsequential, but it could also be very serious, with the potential to harm the public or your client, its investors and creditors.

“The first step in making a judgement when you become aware of NOCLAR is to familiarise yourself with the facts and assess if there is significant potential damage.” 

NOCLAR in practise

Examples of significant NOCLAR could include money laundering, financing terrorism, bribery, corruption and actions that could damage the environment or affect public health and safety.

According to Thomadakis, those developing the standard realised that significant cases of NOCLAR could be very stressful for accountants and could make them feel conflicted. 

“That’s certainly understandable and it’s also human. The standard takes this into account and provides for a first step when becoming aware of a NOCLAR. That is to alert management or those in charge of governance or compliance at the organisation and ask them to take measures to stop or mitigate the NOCLAR.  

“So, it’s not a direct route to disclosure. After taking that first step of approaching management, the accountant can make a judgement as to whether the response by management was appropriate, before considering further disclosure. 

“We’re really saying that disclosure is not a requirement. It is a right and if it does take place, as per the judgement of the accountant, confidentiality is not a problem.” 

“If management is complicit and the accountant doesn’t know that, or if nothing happens, the accountant has to consider his or her next step. This is most likely to be disclosure to a public authority.”

Thomadakis adds: “A big challenge is that in some jurisdictions, there are no adequate protections for accountants who decide to disclose NOCLAR. In some places, there may even be threats to their lives. In the standard, we clearly say this should be taken into account and the accountant has the right to decide whether or not to disclose the authorities.

“The other route is for accountants to simply resign from the engagement, but if they do that, the standard says they should also inform the successor accountant of this.

“We tried to take all possibilities and all routes into account when creating the standard. But at every step, a judgement must be made.”

NOCLAR: a right, not a requirement

“We’re really saying that disclosure is not a requirement. It is a right and if it does take place, as per the judgement of the accountant, confidentiality is not a problem.” 

Thomadakis says the principle of confidentiality aims to create a truthful and sincere relationship between the client and accountant. 

“It’s not there to help cover up illegal actions. That’s something that may serve the client, but it goes against other fundamental principles in the profession such as integrity.

“We believe that if management has nothing to hide and is trying to do the right thing, it would really appreciate, rather than despise, the duty of the accountant to not turn a blind to NOCLAR. We think the bond of trust between the accountant and client may even be strengthened by the accountant disclosing NOCLAR. That bond is based on the trust that each party will do the honest thing.”

What about those situations where accountants may be conflicted? For example, they may worry about losing the client or destroying their reputations.

Thomadakis says: “Again, the accountant has to exercise judgement. But imagine the reverse situation where an accountant turns a blind eye and does nothing about NOCLAR. He or she will live with the risk of consequences down the road. And there have been many cases where in big corporate scandals, the authorities, courts or investors have gone against not only the management when NOCLAR takes place, but also the auditors and accountants.”

Professional Development: Dr Stavros Thomadakis will speak at this year’s World Congress of Accountants, 5-8 November 2018 in Sydney. Learn more about the world’s leading accounting and finance conference.


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