The Public Interest: Client Confidentiality Versus Disclosure of an Illegal Act

The late Muhammad Ali once said, “Silence is golden when you can’t think of a good answer.” What about when a CPA learns that a client is not complying with laws and regulations? Should the CPA maintain client confidentiality (a paramount pillar of the profession), or disclose information to appropriate authorities in order to protect investors, creditors, employees and even the general public?

In terms of non-compliance, is silence “golden”? Or, is the “good answer” to protect the public by disclosing information that is concealed by the boundaries of the AICPA Code of Professional Conduct (Code)?

Over the next several months, the AICPA Professional Ethics Executive Committee (PEEC) will consider updates to the Code to assist AICPA members in determining the best course of action in such scenarios.

Specifically, the PEEC will consider converging the Code with an April 2016 pronouncement by the International Ethics Standards Board for Professional Accountants (IESBA), which is an independent standard setting body of the International Federation of Accountants (IFAC). The pronouncement provides guidance to professional accountants who encounter non-compliance by a client, employer, those charged with governance, or by management or employees of the client or employer.

The pronouncement, entitled “Responding to Non-Compliance with Laws and Regulations” (NOCLAR), provides a framework for response for four categories of professional accountants:

those in public practice performing an audit or review of financial statements,

those in public practice performing professional services other than an audit or review,

senior professional accountants in business,

and professional accountants in business that are not in senior management.

Accountants in public practice who are performing audits and reviews and senior professional accountants in business have a greater responsibility to take action in response to a NOCLAR as compared to the responsibilities of accountants performing other professional services and non-senior accountants in business. This is due to the nature of the auditors’ remit and the higher public expectations of these professionals, and to the decision-making ability, influence and expectations of senior accountants in business.

IESBA’s pronouncement states that when responding to a NOCLAR, the objectives of the accountant are:

To comply with the fundamental principles of integrity and professional behavior;

By alerting management or, where appropriate, those charged with governance of the client, to seek to:
1. Enable them to rectify, remediate or mitigate the consequences of the NOCLAR; or
2. Deter the commission of the NOCLAR where it has not yet occurred; and

To take such further action as appropriate in the public interest.

In the scenario of an accountant in public practice performing an audit, if the client or those charged with governance do not respond to a NOCLAR with appropriate measures, one of the “further actions” that is stated within the pronouncement is for the auditor to disclose “the matter to an appropriate authority even when there is no legal or regulatory requirement to do so.”

The pronouncement further states that when the auditor determines disclosure to be the appropriate course of action after considering specific factors, such disclosure will not be considered a breach of the duty of confidentiality under Section 140 of the IFAC Code of Ethics, Confidentiality.

IESBA’s pronouncement and the PEEC’s subsequent discussions bring to the forefront the debate of serving the public interest versus maintaining confidentiality. As the PEEC considers converging the AICPA Code of Professional Conduct with the pronouncement – as the PEEC does with all of IESBA’s pronouncements – AICPA members and the public are invited to participate in discussions. Any potential revisions made to the Code resulting from the NOCLAR pronouncement will be subject to full due process, including exposure to membership and other interested parties, along with requests for comment.

Individuals can follow the deliberations of the PEEC by attending open quarterly meetings (in-person or via conference call) or reading the latest meeting minutes. Members who wish to become well-versed in the NOCLAR project can find more information here. Also, the most up-to-date version of the Code is available online, and more information on ethics and the Code is available through the AICPA’s Comprehensive Professional Ethics Course.

Jason Evans, CPA, CGMA, Senior Technical Manager – AICPA Professional Ethics Division. Jason Evans oversees ethics enforcement and interpretation of the AICPA Code of Professional Conduct, and provides guidance to membership, state CPA societies, and other interested parties on ethics and independence issues. He also serves as a liaison to the Independence/Behavioral Standards Subcommittee, participates on task forces of the Professional Ethics Executive Committee (PEEC), is a technical advisor to the US representative on the International Federation of Accountants’ International Ethics Standards Board for Accountants, and has served on task forces of the IESBA.

<a href=”https://feeds.feedblitz.com/~/t/0/0/aicpainsights/~Panom / Shutterstock.com“>Muhammad Ali courtesy of Panom/Shutterstock.

The Public Interest: Client Confidentiality Versus Disclosure of an Illegal Act

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