The Professional Duty to Report Fraud and Illegal Acts: An experiment examining a revision to Professional Accountants’ Code of Ethics.

• In Event: 3.03. Audit Reporting Requirements

Abstract

We examine the impact of a major 2019 change to the IESBA Code of Ethics on the professional responsibility of professional accountants. Already adopted by IFAC, a new revision to the Code entitled Noclar is currently being rolled out to its approximately 134-member countries’ code of ethics. Noclar, an acronym for non-compliance with laws and regulations, identifies the actions to be taken by professional accountants when they suspect fraud or a breach of a law by a client or an employer thereby allowing them to breach the principle of confidentiality (IESBA, 2012). While the initial Code of Ethics was not unequivocal on professional accountants’ responsibilities when faced with fraud, Noclar granted professional accountants the “privilege” to report fraud to an external authority as compared to the 2012 Exposure draft (ED) that proposed a “duty”. We used an experiment to evaluate 127 CPAs’ judgment of whether professional responsibility was fulfilled when faced with fraud. When professional accountants reported the fraud to the security’s regulator, there was no difference in judgments of the fulfillment of professional responsibility. However, when professional accountants did not report the fraud to the regulator, judgments that professional responsibility was fulfilled were higher under Noclar than under the initial Code of Ethics or the ED. Contrary to the goals of the IESBA that reportedly adopted Noclar to promote external reporting of fraud, our results suggest that Noclar will likely result in a decline in the reporting of illegal acts and fraud to external authorities. Implications for the accounting profession, society, and for accounting research are discussed.

Authors

• Sameera Khatoon Hassan, York University

• Krista Fiolleau, University of Waterloo

• Linda Thorne, York University

• Carolyn MacTavish, Wilfrid Laurier University

• Pier-Luc Nappert, York University