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FEE has fully subscribed to the objectives and requirements already included in the ISA 250 on “Consideration of Laws and Regulations in an Audit of Financial Statements” which includes having to respond appropriately to non-compliance or suspected non-compliance with laws and regulations identified during the audit. The latter includes reporting non-compliance to those charged with governance, reporting non-compliance in the auditor’s report on the financial statements and reporting non-compliance to regulatory and enforcement authorities resulting from legal responsibilities of the auditor.
FEE therefore recognises that the auditor needs to respond to stakeholders’ expectations to, within the applicable legal framework, “blow the whistle” on clear violations of laws and regulations having a material impact on financial reporting on matters within the remit of the auditor. However, FEE does not support the overall and detailed proposals in the ED.
Underlying the ED is the critically important notion that suspected fraud or other illegal activity by companies [or individuals] must be addressed by company management and those charged with governance and that the accountancy profession should play an integral role in communicating its findings to them. FEE could not endorse that notion more strongly. While the ultimate goal of addressing illegal activity is therefore one FEE fully embraces, FEE believes that the goal is not best achieved through the proposed amendments to the Code. Attempting to impose requirements in this important area through the Code, FEE strongly believes would be unworkable, would have severe negative unintended consequences for all market participants, including the accountancy profession, and would not advance the laudable goal of addressing suspected illegal activity. FEE suggests that the IESBA requests appropriate institutions (e.g. G20, IOSCO, etc.) to stimulate governments to develop legislation to achieve the overall objectives of this IESBA initiative.
FEE understood that the original project proposal was about providing professional accountants with guidance on how they may react on suspected fraud and illegal acts, but now FEE is confronted with a proposal that, if finally adopted, would result in a broad range of requirements to be applied by professional accountants in public practice and in business. FEE does not believe that the measures proposed to address the issue are adequate to be dealt with in a Code for Professional Accountants. The Code is not a legal instrument, and, therefore, unlike those jurisdictions that do have “whistle-blower” legislation in place, cannot provide for protection with respect to the liability of professional accountants in public practice or to the employment situation and personal safety of public accountants in business. Such protection would be particularly necessary, because the proposals relate to suspected illegal acts.
Furthermore, FEE doubts whether the IESBA or the Code are able to ensure that the public interest is served by imposing the proposed specific measures. These would be likely to achieve the opposite result in that people would be more cautious when communicating with the accountant in the first place. FEE therefore suggests that, provided that there are safeguards, such matters should be dealt with in legislation, but not in a Code for Professional Accountants. Where a suspected illegal act is judged by the courts not to be illegal, only legislation can provide for protecting the accountant against legal and other consequences such as, allegations of a breach of confidentiality, and potential physical threats. In addition, legislation will take into account national judicial and cultural specifics, where a Code cannot.
Additionally, when setting up requirements that apply with respect to the provision of professional services, it would be more appropriate if they were constructed in a way that equally applies to all professions which members are potentially in a position to respond to suspected illegal acts, but not solely to professional accountants, in particular when they provide the same or similar types of services. Whilst a legislative framework may achieve this, the Code, as it applies to a certain group of professionals only, does not provide for a level playing field for professionals as such, and would therefore adversely affect members of IFAC member bodies. In this respect, FEE also notes that accountants in business who are not members of an IFAC member body would not be subject to the requirements proposed by the ED.
Under the proposals in the ED, each and every violation of a law or regulation constitutes an illegal act having the same significance as far as its initial consequences are concerned. However, there appear to be circumstances where the effect of a violation could be considered as not being significant to the public interest. There are no clear and unequivocal guidelines in the Code under which circumstances a potential illegal act is significant or not. Such guidelines, however, can probably not be provided, as violations of all "laws and regulations" would constitute an illegal act. However, this should not be compensated by leaving it up to the accountants and auditors to have to determine the significance, especially in a legal context. As a result a very wide range of (often) minor suspected illegal acts for (often) very small entities would be caught by the proposals to report suspected illegal acts internally or possibly externally. It could be questioned whether this is really in the public interest at large.