Code of Ethics for insolvency practitioners – NOCLAR
This article forms part of a series commenced last year looking at specific aspects of Part 5 of the Code of Ethics applicable to insolvency practitioners.
ICAS introduced a revised Code of Ethics as of 1 January 2021. The most significant change in this version of the Code was to highlight the importance of CAs respecting values of ED&I. A year earlier ICAS had adopted a Revised and Restructured Code of Ethics (‘the 2020 Code’) which took on board IESBA’s fundamental redesign of its Code of Ethics that was approved by the Public Interest Oversight Board (PIOB) in 2018.
IESBA’s intention behind the restructuring of the Code was not to fundamentally change the substance of the Code, but to improve its clarity thereby making it more user-friendly.
The current version of Part 5 of the ICAS Code of Ethics took effect from 1 May 2020 and its structure is also substantively based on the Revised and Restructured IESBA Code. A previous article summarises some of the main changes resulting from the implementation of new Part 5 of the Code.
This article focusses on the ‘non-compliance with laws and regulations’ (NOCLAR) provisions and forms part of a series which started last year looking at specific aspects of Part 5 of the Code.
Non-compliance with laws and regulations
The ICAS Code of Ethics introduced IESBA content in relation to what a professional accountant (PA) should do if they encounter actual or suspected “Non-compliance with laws and regulations” (NOCLAR) at their client or employer with effect from 1 November 2017.
The provisions set out a framework to guide the actions to be taken in the public interest by a PA on becoming aware of a potential illegal act committed by a client or employer.
In Part 5 of the Code, an entirely new section (2390) has been created to reflect NOCLAR provisions for IPs and this article looks at that section in more detail.
Assessment and objectives
IPs are required to comply with the Code’s fundamental principles and to apply the conceptual framework to identify, evaluate and address threats. A self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when an insolvency practitioner becomes aware of non-compliance, or suspected non-compliance, with laws and regulations.
An IP might encounter or be made aware of such non-compliance, or suspected non-compliance, in the course of carrying out professional activities. Such non-compliance comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties:
- an entity over which the insolvency practitioner has been appointed;
- those charged with governance of such an entity;
- management of such an entity;
- other individuals working for or under the direction of such an entity;
- the insolvency practitioner’s employing organization;
- those charged with governance of the employing organization;
- management of the employing organization;
- other individuals working for or under the direction of the employing organisation.
The IP must therefore be able to assess the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with the following:
- Laws and regulations generally recognised to have a direct effect on the conduct of an appointment.
- Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the outcome of an appointment.
- Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the operating aspects of the employing organisation’s business, to its ability to continue its business, or to avoid material penalties.
The insolvency profession has an overriding responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the IP are as follows:
- To comply with the principles of integrity and professional behaviour.
- By alerting management or, where appropriate, those charged with governance of the entity, or employing organisation, to seek to:
- Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or
- Deter the commission of the non-compliance or non-compliance where it has not yet occurred.
- To take such further action as appropriate in the public interest.
The Code provides the following examples of laws and regulations which the NOCLAR section addresses:
- insolvency processes and procedures;
- fraud, corruption and bribery;
- money laundering, terrorist financing and proceeds of crime;
- securities markets and trading;
- banking and other financial products and services;
- data protection;
- tax and pension liabilities and payments;
- environmental protection;
- public health and safety.
Responsibilities of IPs
There is perhaps a misconception that the NOCLAR provisions require an IP to report any breach of laws and regulations. This is not the case. The NOCLAR reporting provisions apply only in specific circumstances.
As highlighted in the section above on assessment and objectives, the IP’s duties under the Code are to alert management or those charged with governance of an entity to enable them to act or deter non-compliance and then to take further action as appropriate in the public interest.
In the context of insolvency, with limited exceptions, it is unlikely that the provisions relating to alerting management would be appropriate and therefore in most cases the IP will mostly be concerned with evaluating whether there is a public interest duty to take further action such as reporting to a relevant authority.
Management, however, will still be in place when advising an entity prior to a formal appointment or in relation to an office holder appointment in a CVA or an MVL. In those situations, the entity management still has powers and responsibilities and therefore it would be applicable to consider alerting management or those charged with governance of the entity to the non-compliance situation.
Where an IP becomes aware of a matter to which the NOCLAR provisions apply, the IP should take appropriate and timely steps while considering the nature of the matter and the potential harm to the interests of the entity, creditors, employees, investors, or the public.
If an IP becomes aware of information concerning non-compliance or suspected non-compliance, the IP must apply knowledge and expertise, and exercise professional judgment, in seeking to obtain an understanding of the matter.
The NOCLAR provisions in the Code do not take precedence over local laws and regulations regarding the reporting of actual or suspected non-compliance with laws and regulations. If there is a conflict between local legislation and the provisions of the Code, the professional accountant must adhere to local legislation.
When encountering such non-compliance or suspected non-compliance, the insolvency practitioner must obtain an understanding of those laws and regulations and comply with them. This includes a requirement to report the matter to an appropriate authority and any prohibition on alerting the relevant party.
For example, IPs must be aware of disclosures that could amount to “tipping-off” under UK Anti-Money Laundering laws and regulations.
Specific reporting requirements
The Code sets out specific reporting requirements to communicate the non-compliance or suspected non-compliance to an entity’s external auditor in situations where the IP is supervisor of a CVA or is liquidator in an MVL for an audit client of the firm or a network firm or a component of an audit client of the firm or a network firm.
The Code makes clear that the NOCLAR provisions are not restricted to the IP and sets out in some detail the responsibilities of members of the insolvency team if they become aware of information concerning non-compliance or suspected non-compliance. It is therefore important that all team members are aware of, and trained on, the NOCLAR provisions and have a clear understanding of the extent of their role and the chain of reporting.
Further guidance on NOCLAR is available via the IESBA website.