NZ accountants’ new Code obligations, with Australia close behind

Accountants in New Zealand, including those who are insolvency practitioners, are from this week required to refer relevant breaches of the law committed by their clients or employers to the authorities. Australia follows suit on 1 January 2018. What are the implications for insolvency accountants, and in “safe harbour”?

“NOCLAR” obligations under the international Code of Ethics for Professional Accountants commenced in New Zealand on 15 July 2017. Accountants will already be familiar with the acronym, meaning “non-compliance with laws and regulations”, which allows or requires accountants to override their duty of confidentiality in the case of relevant non-compliance.

Australian accountants pleaded for more time to implement the changes and NOCLAR will commence on 1 January 2018 in Australia.[1]

Commentary by CAANZ , IPA and other bodies is helpful in explaining the new requirements.  But as professionals, accountants should properly refer to the words of the Code in order to assess their obligations.  NOCLAR is selective in the obligations it imposes. While the Code gives examples of “illegal acts such as fraud, corruption, bribery or money laundering”, lesser breaches may warrant referral. The recent court decision finding a bookkeeper liable for being part of the client’s under-paying of migrant workers is one example.

The Code refers to the need for non-compliance to have “a direct and material effect on financial statements of a client or employer”; or to be “fundamental to the business and its operations”, neither of which would include bribery. Materiality is necessary but it appears to be confined to financial consequences for the client or employer, and not to innocent third parties. And while there is an obligation to respond to a client’s unlawfulness, the Code does not require any response to unlawful conduct of the person with whom the client is dealing; an accountant must counsel and perhaps report on their client offering a bribe, but not on their client being offered a bribe. Personal misconduct is out of bounds, even though it may involve a significant crime.

Insolvency practitioners

The extent to which the Code’s NOCLAR obligations apply to insolvency practitioners (IPs) in Australia and NZ who are professional accountants needs to be assessed.

As with many codes, the Code speaks in terms of clients, and IPs have no clients in the normal sense.  But the Code also applies to employers.  In the hypothetical case of a rogue insolvency practitioner, misapplying money, an employee, or a partner, would be obliged to report that misconduct.

Australian and New Zealand insolvency practitioners have their own reporting obligations.  In Australia, these are inconsistent. Liquidators are required to report on all breaches of Australian law, Commonwealth or state, in relation to the company. Trustees have an obligation to report only offences against the Bankruptcy Act.

New Zealand has raised the NOCLAR obligations in its consideration of the law reform of the regulation of insolvency practitioners. This is in the context of what the government describes as the need to improve the effectiveness of IP “whistleblowing” duties under the law in relation to serious offending, to make the law consistent with NOCLAR.

Australia does not yet seem to have embraced NOCLAR, despite its six year development, in which all the professional bodies were participants. The reports of the two current whistleblowing inquiries of both the Senate and Treasury may deal with it.

As to insolvency practitioners, they may, legitimately, see this part of APES 110 as not applying given its focus on clients. But the introduction of the “safe harbour” laws may change that. Insolvency accountants acting for a distressed company would be subject to the requirements to work though the Code requirements when faced with relevant breaches of the law by the company and its directors, and potentially refer any breach. At least one professional body has expressed concern that NOCLAR may be a disincentive for some companies to engage a professional accountant. On the other hand, safe harbour is predicated on the need for legal compliance.

The other issue in Australia is that the whistleblowing authority of IPs is now extended to allow them to report on each other, and to allow many others to blow the whistle on them. These are elements of Australia’s unique IP co-regulatory reforms introduced by the Insolvency Law Reform Act 2016.

A worthy aim

What appears to be a post-GFC reaction of accountants is a worthy aim. But NOCLAR appears to have some inconsistencies and potential adverse consequences.  Having adopted the Code obligation, accountants are now asking the government to offer legal protection from the consequences. Professional bodies might themselves consider programs of support for employees who might reveal their firm’s black economy or unlawful phoenix involvement with its clients.

At recent debates organised by both APESB and then the Australian Academy of Law, an eminent ethicist, Dr Attracta Lagan, spoke in support of NOCLAR from an ethical perspective.  At the Academy gathering, she suggested or invited the lawyers to adopt the same standard. Her arguments appeared sound from an ethical perspective.

If that adoption were to be considered at all, I suggest that lawyers would first want to give thorough consideration to the many legal and other issues that the long history of whistleblowing in its various forms has exposed.

[1] In Australia, this is APES 110 – Code of Ethics for Professional Accountants, and in New Zealand this is the Code of Ethics of the New Zealand Institute of Chartered Accountants and in addition for assurance practitioners, PES 1 Code of Ethics for Assurance Practitioners.