Accountants are taking on an obligation to refer breaches of the law to the authorities, under changes to their international code of ethics, reviving an obligation assessed and addressed by the law some time ago.
Professional ‘accountants’ are bound by the International Code of Ethics for Professional Accountants, maintained by IESBA. The obligation to respond to ‘non-compliance with laws and regulation’ (NOCLAR) is proposed to be covered in new sections 225 and 360 of the Code.
This is the result of a long running international project to clarify the responsibilities of accountants in practice and in business when they come across real or suspected breaches of the law. While this is understood to be subject to final approval, the changes are expected to be operative from 15 July 2017.
The sentiment is worthy and appears prompted by a post GFC perspective that asked how such a crisis happened and what was not revealed or reported about corporate accounting and financial misconduct along the way.
Without discounting the worth of pursuing the project, some comments are made querying its detail.
The law – misprision of felony
From a legal perspective, society has for centuries addressed a need for grassroots reporting of crime. The law required citizens to report the commission a crime, by way of “raising hue and cry”, that is, by reporting it to the sheriff who would then “levy” hue and cry, that is, shout aloud for the citizenry to pursue the offender and arrest him, or her, and the citizens themselves had a duty to join in the pursuit. This was based on the fact that there were then no police forces, criminal justice and reporting being truly privatized. Knowledge of treason imposed a particular obligation to inform the king or queen of any impending insurrection. Unfortunately, and tellingly for the present, this was abused with apprehenders demanding release money from the offender, to allow an escape before the sheriff arrived, or bounty fees for capture. Vigilantes were another abuse of a worthy aim.
Misprision of felony was famously the subject of a UK decision of Lord Denning in the 1960s – Sykes v DPP [1962] AC 528 – where what was said to be a 700 year old common law offence was confirmed to still exist, allowing the prosecution of those involved in the theft of firearms for their sale to the Irish Republican Army.
There followed various moves for the repeal of the law of misprision, the historical need for its retention disappearing and reinforced by a sense that most citizens felt a moral obligation to report serious crimes anyway.
Misprision of felony was abolished in the United Kingdom in 1967, and all Australian States followed. New South Wales replaced it with a statutory offence under s 316 of the Crimes Act 1900, making it an offence not to report a “serious” crime (one with a penalty of 5 years or more in prison) unless there was a reasonable excuse. The other States went a different way, making the concealment of a crime an offence only if the concealment was in return for some gain.
It does remain an offence in the US Code, along the lines of the NSW offence, § 4 imposing up to 3 years jail on a person with knowledge of the actual commission of a felony who conceals it and does not as soon as possible report it.
Knowledge of illegality
The Ethics Code changes are part of a general move to again enlist the citizenry in hue and cry. While we do now have police and regulators who have served us well for some long time, there appears to be a recognition that the battle against the dark forces is being lost, what with the increased complexity of dealings, the internationalisation of crime, and the need to prevent the huge economic and financial impact of major fraud and corruption.
From gatekeepers to tip-offs to prescribed obligations to report, more is being imposed upon or expected of professionals and even members of the public to enlist in the fight. These legal requirements are particularly found in the areas of money laundering, tax, and and terrorism.
The Code accounting developments do bring a focus on our obligations if we become aware of illegality, an obvious one being a witness to a serious assault or homicide, or a ‘hit and run’ driver. In the accounting space, it may be a financial fraud or tax evasion.
While an understanding of illegality and suspicion of it is not the preserve of lawyers, there is some concern about imposing a particular obligation on non-lawyers to report not only illegality – which assumes a knowledge of the law – but also suspicion – which should also assume an understanding of the various grades of suspicion and the potential for a reasonable explanation available. It may not be quite the same as imposing upon lawyers the obligation to report accounting irregularities but it is in that spectrum. The Code provisions do assist with various caveats and guidance around these issues, including the need to take legal advice. Clarity in legal wording is also important – what is meant by ‘laws’ as opposed to ‘regulation’ does not seem to be defined in the Code, and the old command word ‘shall’ is ubiquitous.
Any such obligation in law is also usually qualified by issues around self-incrimination of those reporting and reasonable defences of duress. A training in law offers healthy scepticism and an understanding of rule of law fundamentals of fairness and presumptions of innocence. Although far removed, a person who reports an offence without basis can be guilty of an offence in itself.
While the uncertain legal distinction between felonies and misdemeanours was one reason for the repeal of the offence of misprision, the NOCLAR obligation may raise the related questions of materiality, consequences of breach, nature of perpetrator and so on.
The imposition of this on accountants also raises the issue that there may be no comparable duty imposed on other professionals, assuming there is always a clear delineation. While accountants may need to report environmental breaches, engineers may not, but many a professional in that field is qualified in both. Who is an ’accountant’ also needs to be clear, the definition limited to those who are members of Australia’s three accounting bodies, themselves members of the International Federation of Accountants (IFAC).
Liquidators and bankruptcy trustees
In the context of insolvency, there is generally an obligation on liquidators and comparable appointees to investigate and report breaches of the law under the relevant insolvency laws. There is also generally a statutory protection from liability, assuming good faith. Internationally, practitioners are either lawyers or accountants, and often with other disciplines as well.
NOCLAR raises the issue whether a positive obligation to report may now be imposed on a liquidator accountant from a professional separately from any legal obligation. A response to that may be that in legal terms, the relevant insolvency laws “cover the field”, and exclude the International Code, such that a liquidator would not have a separate obligation to report. That issue may not arise in jurisdictions where insolvency practitioners are trained in law.
The extent and range of misconduct that accountants are expected to report might be an issue. Under a statutory obligation, it is recorded that in a period between 2011 and 2014, insolvency administrators alleged misconduct in over 28,000 of their statutory reports, constituting over 52,000 possible breaches. That suggests either over-reporting of breaches, or that many company controllers commit breaches of the law in the lead-up to or during insolvency; leading to a reasonable assumption that such breaches are common in corporate conduct generally. Or from a criminal and corporate policy viewpoint, there appears to be too many rules. The Code obligation would not sensibly lead to that level of what might be seen as misplaced enthusiasm.
As to insolvency professional bodies, under the Insolvency Law Reform Act 2016, while not expressed as an obligation, such “industrial” bodies – yet to be prescribed – may decide that they reasonably suspect an insolvency practitioner’s default, up to the level of seriousness warranting cancellation, such that the practitioner be referred to a regulator. Protection from the consequences of making an ill-founded referral is based on reasonableness and good faith. Criteria for cancellation of registration as a liquidator or trustee include that the practitioner has been convicted of an offence involving fraud or dishonesty. Beyond the exercise of a discretion to refer under the Act, the Code may impose on an industry body, or at least its accounting members, a professional responsibility to report in any event.
A need to monitor
The work of IESBA is commendable but in any moves to address concerns about misconduct in the past, long experience shows that some caution is needed in over-reacting for the future. The sentiment of hue and cry often quickly disposes of the protection of procedural fairness and the presumption of innocence. As long as the International Code is applied here with caution, with an understanding and acknowledgement of our legal standards and protections, it may serve a good purpose, result in some crime prevention or prosecution, promote some change in culture and lead to better conduct. But if that comes at a cost of too readily condemning the innocent, or opening them up to investigations without basis, the Code will have gone too far. In its wording, it does not do this and should not have that impact. It is necessary though, before it commences, for reporting mechanisms to be put in place in order to allow its impact to be measured and assessed.
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