The new ethical standard for auditors and other professional accountants ie NOCLAR is going to transform the thinking and practice of accounting profession globally and enable the profession to play a greater role in the fight against significant non-compliances with laws and regulations.
The accounting profession has a vital role and obligation to society and public in addition to its fiduciary duty to employers and clients. In recent days, however, we see the accounting profession compromising on basic principles of ethics ingrained in ethical codes applicable on professionals. The recent massive leaks of financial documents under Panama and Paradise papers have exposed the vulnerability of accountants and auditors in acting as a facilitator of tax evasion practices instead of being a gatekeeper as traditionally acknowledged. This has perturbed the global accounting profession about the need for a more stringent mechanism for ethical compliance of their members and increasing role towards protecting the public interests.
The integrity of accountants and auditors, in addition to lawyers, are now being questioned globally which points towards the failure of self-regulation model of professional accounting bodiesin raising the ethical standards of members. In this perspective, role of financial reporting councils is assuming more significance. These independent regulatory bodies, acting as 'watchdogs' on accounting and auditing profession, are operating in various jurisdictions outside the professional regime having representations from cross sections of the society.
The panama leaks have led to a widespread public debate on the responsibility of accounting and legal professionals. In UK, a Task Force was formed in the wake of Panama leaks to investigate allegations of tax-dodging and money laundering. The politicians in UK are now openly criticizing the role of Big Four accounting firms in facilitating multinationals and wealthy elites to avail offshore heavens to avoid tax payments. One big international accounting firm in Canada has even confessed before a parliamentary finance committee that it put 27 wealthy Canadians into offshore tax shelters for an average fee of $10 thousand. This has caused huge tax losses for the Canadian government. There are other instances, especially in UK and USA, where the international accounting firms are found complicit in wrong doings such as tax fraud and showing fictitious tax losses for their clients.
The involvement of accountants in illegal financial transactions and malpractices in not a new phenomenon. In fact, the Financial Action Task Force (FATF) of the Organisation for Economic Cooperation and Development (OECD) in one of its reports published way back in 2004 disclosed that "accountants are not only advising criminals on money laundering, but arranging paperwork and even conducting illicit transactions themselves."It stated that corrupt accountants are using their skills to hide money laundering using complex and highly technical methods, such as triangle transactions and electronic transfers. This disclosure was in fact a precursor to what we are witnessing today in shape of 11.5 million records of Panama Paper leaks and 13.5 million of Paradise Paper leaks.
This needs to be realized by the accounting community that apart from their key role in helping organizations to act ethically, they also owe to the society and general public. They need to balance between serving the public interest and the interest of their clients. They need to build public trust and value by maintaining high standards of ethics and by acting as a protector of public interests. Any failure on their part to disclose information affecting public interest would be termed as unfair and unethical and may undermine public perception of their trustworthiness.
The accountants also need to play a proactive role in the regulatory framework to strengthen high ethical standards and ensure accountability and transparency in public sector organizations. The accountants and auditors who are associated with audit firms and tax consultancy firms have a special responsibility to keep insight and vigilance on weakness in regulatory process and legislations as well as conflicts of interest which compromises ethical values and discourages level playing field to professionals. The accountants must engage with the FBR in tax matters so as to ensure that public interests have been protected in different laws and regulations, especially in budget allocations. They need to specifically ensure that extra tax burden is not passed on to the people by public interest agencies such as electricity distribution companies which often include extra amounts in bills in shape of surcharges etc.
The inefficiencies in the power utility sector are unfortunately managed through transfer of unjustified cost in shape of high tariff to the end consumers. The accountants employed or associated with the power sector have the ethical duty and responsibility to ensure that the excess cost is not transferred to the consumers. They must make sure that there is transparent information exchange so that ethical values are not compromised.
It is the duty of Professional Accountancy Organizations (PAO) to promote and monitor adherence of their members to professional and ethical standards and equip them with technical and ethical competence to meet the needs of community and public interest. This would not only enhance transparency and accountability in the use of public resources but also improve its delivery to the common man. In this context, the Financial Reporting Council (FRC) of UK need to be appreciated that it has taken the lead and is considering to impose heavy penalties on accountants and advisors who are found facilitating people to bend rules for gaining tax advantage. The fine being considered in new rules is upto 100 percent of tax amount avoided - including via offshore heavens. It is expected that huge fines would act as a deterrent to accountants and advisors from misusing their professional skills.
The leaders of global professional accounting bodies also need to condemn the abusive tax shelters and put in place a stringent regulatory framework that could help raise ethical standards of the profession and compel accountants and auditors to promote public interests and not personal interests of their wealthy clients.
NOCLAR
In the above context, release of a new global standard on responding to 'Non-Compliance with Laws and Regulations (NOCLAR) by International Ethics Standards Board for Accountants (IESBA) is a welcome and timely initiative. This standard would make the accountants and auditors to act in the larger interests of the society and public and not give any leeway to them to facilitate clients in availing tax avoidance sanctuaries as we have recently seen globally in case of Panama and Paradise paper leaks. NOCLAR would in fact, compel them to disclose suspected illegal acts of their clients or employers such as tax frauds, corruption, bribery, money laundering etc by breaking the traditional role of ensuring principle of confidentiality.
NOCLAR expects from accountants not to keep silence on wrongdoings of their clients, rather they must be reporting non-compliance situations to appropriate public authorities without any fear or favour. However, the situation on the ground is that accountants in every jurisdiction are hesitant in taking responsibility in this regard. For instance in UK, the National Crime Agency (NCA) which is responsible for tackling many sorts of criminality such as tax offences, corruption, money laundering and terrorist financing, mentions in its 'Suspicious Activity Reports (SARs)Annual Report 2017' that the 'accountants and tax advisors' submitted just 6693 SARs during the period from October 2015 to March 2017 - which is barely 1.06 percent of the total 634,113 SARs received by NCA.
NOCLAR has provided specific guidelines to auditors and accountants with regard to their responsibilities in case they come across any non-compliance by clients. Previously, auditors used to resign when they come across any non-compliance or fraudulent transaction, thus keeping matters under the rug and compromising upon the public interest. Now, they cannot do this after coming into effect of NOCLAR. They are now required under NOCLAR provisions to bring the non-compliance first in the notice of the management or the people in governance and in case they do not respond positively, to the appropriate authority. The public interest cannot be ignored now by the auditors.
NOCLAR in Pakistan
NOCLAR has been effective worldwide since 15th July 2017 and many professional accounting bodies are in process of its adoption. ICMA Pakistan which has always been quite vocal on inculcating professional norms and ethics in the accounting and finance has added another feather in its cap by adopting NOCLAR in November 2017. This standard would now be applicable to over 5000 members of the Institute within Pakistan and abroad.
The Institute also intends to create wide awareness seminarsabout NOCLAR for its members and other finance professionals.This training is imperative in the changing global perspective which has cast doubts on the accounting profession as a facilitator of tax evasion and fraud practices. The accountants need to be especially trained in areas of personal and organizational ethics as well as their social responsibility towards safeguarding public interests. They must be taught and trained to be at the forefront of fight against fraud and corruption and not to become part of it.
In the perspective of Pakistan, the corporate sector also needs to be acquainted that in changing dynamics of global financial reporting and latest applicability of NOCLAR, they must ensure as part of their HR policy to engage members of only recognized professional accounting bodies as employees, consultants and advisors in order to prevent and correct any non-compliances within the organizations, especially to prevent frauds. Though fraud prevention is generally considered to be the responsibility of financial accountants, the management accountants can also play a pivotal role in enhancing the organizations' capacity to fight fraud. They can help develop and implement robust fraud prevention and internal control systems within the organizations that could minimize the possibility of fraud incidents and maximize the probability of early detection of such incidents. The management accountants can advise the management and boards about fraud risk areas and preventive measures.
Here, I must clarify that the intention of this article is not to suggest that the accounting profession as a whole is corrupt and that all the accountants are lacking in ethics. It is a fact that there are black sheeps and bad apples in every organization and society and the wrongdoingsof few people can bring bad reputation to the entire profession. While having working experience in Public and Private Sector, I can say that majority of people are honest having high moral and ethical values. These are few people with low ethical values, who become accountants and facilitate the corrupt elements within government and corporate sector in fulfilling their ulterior motives to avoid tax payments and hide money. To conclude, the accountants and auditors must adopt NOCLAR and begin a new era of their professional career that would make them recognize in the world as a 'gatekeeper' of public interests.
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