NOCLAR and insolvency practitioners

The NOCLAR obligations of accountants have now been highlighted in the context of the insolvency industry by way of a useful article appearing in the ARITA Journal.[1]

NOCLAR – in accountants’ terminology, ‘non-compliance with laws and regulations’ – is a new obligation assumed under the International Code of Ethics of Professional Accountants – APES 110. In so far as most insolvency practitioners are ‘professional accountants’ – as members of CAANZ, CPA or IPA – the obligation applies to them. At the same time, given the limitations of the NOCLAR obligation, in some respects insolvency practitioners are not affected.

The ARITA article does raise some issues for debate.[2]

Clients

The NOCLAR obligation is carefully confined – to report on clients, or employers, but not others.  So, if an accountant become aware of illegal activity of a person dealing with their client, the obligation does not apply; for example, if a bribe is offered to the client by the other person, although that offence may raise other legal obligations.

Insolvency practitioners appointed to insolvency administrations don’t have clients as such and the NOCLAR obligation does not apply to them in that context. In any event, an insolvency practitioner has statutory obligations to report on breaches of the law, although different according to whether the practitioner is a bankruptcy trustee (bankruptcy offences only, to AFSA) or a liquidator (all breaches of the law concerning the company, to ASIC).

But an insolvency practitioner appointed by a bank as a receiver or agent does involve a client relationship.  A NOCLAR obligation might arise, for example, if the receiver became aware of bank officers acting unlawfully.

Employers

A more immediate scenario could be if an employee were to observe unlawful conduct in their insolvency firm, involving, as ASIC says, ‘improper gain’, that is, taking funds from the administration without valid authority.  That circumstance in fact arose some years ago, and the difficult question it raises is as to when and how an employee might be expected report on their employer, to in effect ‘whistleblow’.  Concern has been expressed that there is no apparent support provided by the professional bodies for an employee whistleblower in that circumstance.

Industry grapevines

And although NOCLAR obligations are confined, silence in the face of obvious and on-going misconduct by a fellow practitioner, or a partner in a firm, raises negative perception issues about the integrity of the industry.

In that respect, it is relevant to point out at the newly released RITANZ Code of Conduct does require a member to report on another member’s misconduct.

Legislative protection

APESB has sought legislative protection from liability for professional accountants complying with NOCLAR but at the moment this does not appear to have been addressed in the draft legislation; and perhaps it should not be, given the accounting drafting and language of the NOCLAR obligation.  The ARITA article refers to the prospect of APESB issuing some ‘legislative instrument’ to give the Code ‘weight of law’, which would be legally interesting.

The law

In fact, one aspect of NOCLAR is that it is not evident that any legal advice was sought by the professional accountants on what is quite a serious self-imposed professional obligation. It would be as if the lawyers settled upon reporting deficiencies in financial statements without seeking accounting advice.

With the potential for accountants ending up in ‘hot water’, the article does wisely suggest that legal advice be sought before acting.  While that may be necessary, it might have been better if the accountants had sought legal advice before agreeing to these broad obligations.

The law itself is quite confined and careful in imposing such an obligation, for policy reasons, and it is only in NSW that the old concept of the offence of misprision of felony survives.  What is interesting about that offence is that there is a limited carve-out protection for lawyers, doctors, social workers and the like, but not for accountants. It is perhaps surprising that more prosecutions of accounting advisers under that provision have not ensued.

There are no doubt many other legal issues involved in reporting on suspected unlawfulness, by people who, for one thing, are not lawyers, nor expected to be. Even the panel convened for this article does not comprise a lawyer, experienced though the panel may be.

For example, dealing with a client’s suspected unlawful conduct ‘internally’ is fraught with issues, including of perception, with UK accountants warned of the potential to commit “tipping-off” offences under their anti-money laundering laws; the consequences of incorrect reporting of an offence could be actionable; limiting the reporting of unlawfulness to its impact only on the company itself allows an accountant to side-step the reporting of other serious offences; and some offences must be reported, irrespective of NOCLAR.

Safe harbour advisers

The article does correctly raise the fact that the obligation impacts safe harbour accounting advisers, although legal and other qualified turnaround advisers are not bound by the NOCLAR  obligation. Among the many warnings about NOCLAR in its early development was one that suggested that clients, particularly those in financial distress, might avoid seeking advice from a profession whose terms of engagement required the client to acknowledge that their unlawful conduct may be reported.

The new gatekeepers

Apart from the detail of NOCLAR, the new obligation, worthy as it may be, potentially allows a negative perception to exist arising from the fallout of, for example, findings of corporate misconduct and loss of investors’ moneys. Whatever the particular obligations imposed by NOCLAR, accountants may well be viewed as the public gatekeeper, such that blame for major corporate failings, whether valid or not, will be placed upon them, for not speaking out and reporting misconduct.  In that sort of climate, there is often not too much sympathy for, or acknowledgement of, the finer points of the limitations of the NOCLAR obligations.

That problem already exists in the accounting and legal bodies’ new legal authority to refer an insolvency practitioner’s misconduct to a regulator, under s 40-100 of the Schedules.  While that is not a legal obligation, if there were to be any major insolvency practitioner default, questions may nevertheless be asked by ASIC and others why the relevant bodies reported nothing.

The ARITA article makes a valuable contribution to the debate but also raises many more issues for discussion, and, perhaps, legal advice.

Note: references in this commentary can be found in the 12 or more articles on this website concerning NOCLAR.  Please contact me if I can assist.

[1] NOCLAR: what it means for you, Agnes King (2018) 30(1) ARITA J 20

[2] An attempt was made to contact Ms King; and I remain available to discuss, and correct or clarify, as needs be.

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