New proposals would provide guidance on CPAs' NOCLAR duties

By Ken Tysiac

Proposed guidance on CPAs’ responsibilities related to noncompliance with laws and regulations (NOCLAR) is provided in complementary exposure drafts issued Thursday by the AICPA Professional Ethics Executive Committee (PEEC) and the AICPA Auditing Standards Board (ASB).

PEEC’s ED, Proposed Interpretations and Definition, Responding to Noncompliance With Laws and Regulations, is a reproposal of an ED issued March 10, 2017, as part of PEEC’s international convergence efforts. The original proposal was meant to align PEEC’s standards with those of the International Ethics Standards Board for Accountants (IESBA).

Although PEEC believes many of the requirements in the original proposal are consistent with the IESBA Code of Ethics, the new ED proposes certain modifications to enhance the clarity of the proposed interpretations and make them relevant to AICPA members in the United States.

Under the new PEEC proposal:

  • There are separate requirements for members providing financial statement attest services and members providing services other than financial statement attest services. The requirements are less restrictive for members providing services other than financial statement attest services.
  • The member’s responsibility throughout the proposed interpretation would be exclusively to the “engaging entity,” if not the same as the “subject entity.” If the engaging entity and the subject entity are different, the term “client” in the standard would refer to the engaging entity.
  • The proposed interpretation would not apply to a litigation or investigation engagement performed in accordance with the AICPA Statement on Standards for Forensic Services No. 1 or to tax services subject to the protection of Internal Revenue Code Sec. 7525.
  • Members in business would be permitted to report a NOCLAR to an appropriate authority unless prohibited by laws or regulations.
  • A number of clarifications would be made to the original proposed interpretation.

The ASB’s ED is titled Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations. The ED would amend Statement on Auditing Standards No. 122, as amended, Section 210, Terms of Engagement.

Under the proposal, AU-C Section 210 in the AICPA Professional Standards would be amended to require a successor auditor, once management authorizes the predecessor auditor to respond to inquiries from the successor auditor, to inquire of the predecessor auditor regarding identified or suspected fraud and matters involving noncompliance with laws and regulations.

The ASB retained the requirement for client consent as a practical matter, as the successor may not know the identity of the predecessor and because the predecessor auditor may have no way of verifying that management was considering engaging the successor without the client’s involvement. A refusal to consent by the client would be a significant red flag that the successor would consider in determining whether to accept the engagement. The overall objective of the proposed standard is to help auditors properly understand potential issues in determining whether to accept an engagement.

Comments on the EDs are due June 30. Comments can be submitted by email to Ethics-ExposureDraft@aicpa.com for the PEEC ED, and to commentletters@aicpa-cima.com for the ASB ED.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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