AICPA Flags Concerns about IFAC's International Ethics Standards Board's Exposure Draft on Responding to a Suspected Illegal Act

December 20, 2012

The American Institute of CPAs’ Professional Ethics Executive Committee (PEEC) has flagged a number of concerns about the requirements that would be imposed on professional accountants by an Exposure Draft issued in August 2012 by the International Federation of Accountants’ (IFAC) International Ethics Standards Board for Accountants (IESBA).  In its comment letter, the PEEC suggested alternatives to the measures proposed in the Exposure Draft. 

The IESBA Exposure Draft proposes new requirements under the IESBA Code of Ethics for Professional Accountants (the Code) to address the circumstances where a professional accountant in public practice and business shall, or has a right to, override the fundamental principle of confidentiality and disclose a suspected illegal act committed by a client or employer to an appropriate external authority. 

In its letter, PEEC said, “We understand that the IESBA is seeking to address the fact that, while the principle of confidentiality properly recognizes that candid communications between professional accountants and their clients or employers are desirable and enhance the ability of accountants to provide high-quality services that benefit the public, it might also discredit the profession if an accountant who suspected an illegal act by his or her client or employer did nothing or knowingly allowed his or her services to be used in furtherance of a client’s misconduct.”

PEEC said, however, that “we do not believe that the response to the tensions identified by the IESBA should place a professional accountant at risk of violating his or her legal or contractual duties of confidentiality to a client or employer or impose a potential responsibility on a professional accountant in the Code to disclose suspected illegal acts to an external authority.  We believe that such an obligation should only be required of an accountant by a national regulator, pursuant to a law or regulation that also incorporates ‘safe-harbor’ provisions that protect the accountant from potential liability for allegedly unauthorized or unjustified disclosures.”

Instead, the letter said, under the PEEC’s proposed solution, the IESBA might provide guidance that, in appropriate circumstances, a professional accountant should be expected to:

  • report suspected illegal acts to the appropriate levels of management of a client or employer, and possibly to those charged with governance, if management’s response is not timely and appropriate;
  • consider disclosure to the external auditor, provided that such disclosure would not violate any legal or contractual confidentiality or non-disclosure requirements applicable to the engagement;
  • encourage the client or employer to disclose the matter to an appropriate authority; and
  • consider his or her continuing relationship with the client or employer if the client or employer fails to address the professional accountant’s concerns.

The PEEC’s comment letter notes specific aspects of the Exposure Draft that it believes warrant further consideration by the IESBA in order to mitigate the risk of potential conflicts with existing laws and regulations; provide additional clarity to accountants as to the circumstances that may give rise to reporting obligations; and avoid unintended consequences and disruption to the markets for professional services.