AICPA’s PEEC and ASB Issue New NOCLAR Requirements
The AICPA’s Professional Ethics Executive Committee (PEEC) and Auditing Standards Board (ASB) recently issued new requirements regarding noncompliance with laws and regulations (NOCLAR).
The PEEC approved new NOCLAR interpretations within the AICPA Code of Professional Conduct. The new interpretations of the "Integrity and Objectivity Rule" (ET §1.100.001 and ET §2.100.001) are titled "Responding to Noncompliance With Laws and Regulations" (ET §1.180.010 and ET §2.180.010). They are effective June 30, 2023, and early implementation is allowed.
In correspondence with the release of the interpretations, the ASB issued Statement on Auditing Standards (SAS) No. 147, Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations. The standard requires an auditor, once management permits the predecessor auditor to respond, to inquire of the predecessor auditor about identified or suspected fraud or NOCLAR. SAS No. 147 is effective for audits of financial statements for periods beginning on or after June 30, 2023.
The interpretations define NOCLAR as intentional or unintentional acts of omission or commission contrary to laws and regulations committed by a client or an employer – by those charged with governance, management, or other individuals working for or under the direction of the client or employer.
The interpretation for AICPA members in public practice has different requirements for those providing financial statement audit or review services and those providing other services. Members providing financial statement audit or review services must attain an understanding of the matter, advise the client to take appropriate and timely actions to correct or reduce the effect of the NOCLAR and document certain aspects of the NOCLAR.
Also, there are different requirements for members in business who are senior professional accountants and members other than those who are senior professional accountants. Senior professional accountants in business must attain an understanding of the matter and:
- Communicate the matter to those charged with governance;
- Abide by applicable laws and regulations;
- Have the consequences of the NOCLAR rectified, remediated or mitigated;
- Reduce the risk of reoccurrence;
- Attempt to avert the commission of the NOCLAR if it has not yet occurred; and
- Assess the appropriateness of the response of the member's superiors, if any, and those charged with governance and determine if additional action is needed in the public interest.
Members in business are allowed to report a NOCLAR to an authority unless prohibited by laws or regulations. Documentation is encouraged but not required.
The interpretations do not apply to an engagement or the provision of services by a member involving:
- A litigation or investigation as defined in AICPA Statement on Standards for Forensic Services No. 1;
- An engagement or service where the main purpose is to identify, reach a conclusion regarding or otherwise respond to a known or potential NOCLAR;
- An engagement or service pursuant to which the protections detailed in Internal Revenue Code Sec. 7525 or any comparable state or local statutes apply; or
- An engagement or service where compliance with the interpretation would violate a law or regulation.
The PEEC issued the interpretations in February, and the ASB approved SAS No. 147 in March. An overview of SAS No. 147 is available online to AICPA members.