The accounting profession has a vital role and obligation to society and public — in addition to its fiduciary duty to employers and clients. In recent days, however, we see the accounting profession compromising on basic ethical principles. The recent massive leaks of financial documents under the Panama and Paradise Papers have exposed the vulnerability of accountants and auditors in acting as a facilitator of tax-evasion practices instead of being a gatekeeper. This has perturbed the global accounting profession about the need for a more stringent mechanism for ethical compliance of their members and increasing the role towards protecting public interests.
The integrity of accountants or auditors, in addition to lawyers, is now being questioned globally which points towards the failure of self-regulation model of professional accounting bodies in raising the ethical standards of members. In this perspective, the role of financial reporting councils is assuming more significance. These independent regulatory bodies, acting as ‘watchdogs’ on accounting and auditing profession, are operating in various jurisdictions outside the professional regime having representations from a cross section of society.
The Panama Leaks have led to a widespread public debate on the responsibility of accounting and legal professionals. In the UK, a task force was formed in the wake of the Panama Leaks to investigate allegations of tax-dodging and money laundering. Politicians there are now openly criticising the role of the Big Four accounting firms in facilitating multinationals and wealthy elites to avail offshore havens to avoid tax payments. One big international accounting firm in Canada has even confessed before a parliamentary finance committee that it put 27 wealthy Canadians into offshore tax shelters for an average fee of $10,000. This has caused huge tax losses for the Canadian government. There are other instances where international accounting firms are found complicit in wrongdoings.
The involvement of accountants in illegal financial transactions and malpractices is not a new phenomenon. In fact, the Financial Action Task Force of the Organisation for Economic Cooperation and Development in one of its reports published in 2004 disclosed that “accountants are not only advising criminals on money laundering, but arranging paperwork and even conducting illicit transactions themselves.” It stated that corrupt accountants are using their skills to hide money laundering using complex and highly technical methods, such as triangle transactions and electronic transfers. This disclosure was in fact a precursor to what we are witnessing today in the shape of 11.5 million records of the Panama Papers and 13.5 million of the Paradise Papers.
This needs to be realised by the accounting community that apart from their key role in helping organisations to act ethically, they also have an obilgation to the public. They need to balance between serving public interest and client interest. They need to build public trust and value by maintaining high standards of ethics and by acting as a protector of public interests. Any failure on their part to disclose information affecting public interest would be termed unfair and unethical and may undermine public perception of their trustworthiness.
The accountants also need to play a proactive role in the regulatory framework to strengthen high ethical standards and ensure accountability and transparency in public-sector organisations. The accountants and auditors who are associated with audit firms and tax consultancy firms have a special responsibility to keep insight and vigilance on weakness in regulatory process and legislations as well as conflicts of interest. They must engage with the FBR in tax matters so as to ensure that public interests have been protected in different laws and regulations, especially in budget allocations. They need to specifically ensure that an extra tax burden is not passed on to the people by public interest agencies.
It is the duty of professional accountancy organisations to promote and monitor adherence of their members to professional and ethical standards and equip them with technical and ethical competence to meet the needs of community and public interest. This would not only enhance transparency and accountability in the use of public resources but also improve its delivery to the common man. Leaders of global professional accounting bodies also need to condemn the abusive tax shelters and put in place a stringent regulatory framework that can help raise ethical standards of the profession.
The release of a new global standard on responding to Non-Compliance with Laws and Regulations (NOCLAR) by International Ethics Standards Board for Accountants (IESBA) is a welcome and timely initiative. This standard would help accountants and auditors to act in the larger interest and not give any leeway to them to facilitate clients in availing tax avoidance sanctuaries. NOCLAR would, in fact, compel them to disclose suspected illegal acts of their clients or employers.
It expects accountants, for instance, not to keep silent on wrongdoings of their clients and report non-compliance to appropriate public authorities without any fear or favour. However, the situation on the ground is that accountants in every jurisdiction are hesitant to take responsibility in this regard. For instance in the UK, the National Crime Agency (NCA) mentions in its ‘Suspicious Activity Reports (SARs) Annual Report 2017’ that the ‘accountants and tax advisers’ submitted just 6,693 SARs during the period from October 2015 to March 2017 — which is barely 1.06 per cent of the total 634,113 SARs received by NCA.
The regulations provide specific guidelines to auditors and accountants with regard to their responsibilities in case they come across non-compliance by clients. Previously, auditors used to resign when they come across any non-compliance or fraudulent transaction. Now, they cannot do this after coming into effect of NOCLAR. They are now required under NOCLAR provisions to bring non-compliance first in the notice of the management or the people in governance and in case they do not respond positively, to the appropriate authority. The public interest cannot be ignored now by the auditors.
The system has been effective worldwide since July 15th 2017 and many professional accounting bodies are in process of its adoption. ICMA Pakistan has added another feather in its cap by adopting NOCLAR in November 2017. This standard would now be applicable to over 5,000 members of the institute within Pakistan and abroad. The institute also intends to create wide awareness seminars about NOCLAR for its members and other finance professionals. This training is imperative in the changing global perspective which has cast doubts on the accounting profession as a facilitator of tax evasion and fraud practices.
In the perspective of Pakistan, the corporate sector also needs to be acquainted that in changing dynamics of global financial reporting and latest applicability of NOCLAR, they must ensure as part of their human resources policy to engage members of only recognised professional accounting bodies as employees, consultants and advisers in order to prevent and correct any non-compliances within the organisations.
This is not to suggest that the accounting profession as a whole is corrupt and that all the accountants are lacking in ethics. It is a fact that there are black sheep and bad apples in every organisation and society. I can say that majority of people are honest having high moral and ethical values. There are few people with low ethical values, who facilitate the corrupt elements within the government and corporate sectors in fulfilling their ulterior motives to avoid tax payments and hide money. Accountants and auditors must adopt NOCLAR and begin a new era of their professional career that would make them recognise in the world as a ‘gatekeeper’ of public interests.
Published in The Express Tribune, January 24th, 2018.
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