Risk & Compliance

When Should Accountants Spill the Beans?

A new code of ethics puts finance chiefs on the hook to report suspected fraud to corporate boards.
Kathy HoffelderSeptember 6, 2012

Under proposed changes to a global ethics code for accountants, while auditors must report a suspected fraud to outside authorities, management accountants need only report their suspicions internally. At the same time, if corporate accountants spill the beans to CFOs, finance chiefs must report what they’ve learned to other senior executives and the audit committee of the board.

As a matter of principle, corporate accountants have always maintained a degree of confidentiality about companies’ finances. But there has never been any guidance concerning when that confidentiality should be breached.

In the case of suspected fraud or other illegal acts, however, the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting board, is finally suggesting new steps that different accountants should take to disclose that information to management, the board, or external sources. Last month the IESBA issued an exposure draft on how professional accountants should disclose suspected illegal acts committed by a client or employer. The draft adds changes to the Code of Ethics for Professional Accountants, which was first revised in 2009.

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The IESBA exposure draft distinguishes between auditors and corporate and other professional accountants. If the suspected illegal act affects financial reporting or is within the expertise of the auditor, the auditor would be required to discuss the issue with management and the audit committee. If the response within the company is, in the auditor’s judgment, “not appropriate” and “of such consequence that disclosure would be in the public interest,” the auditor must disclose the suspected illegalities to “appropriate” external authorities, according to the proposal.

For other professional accountants, including those who work for corporations, the approach would be similar except for one thing: while auditors are required to report to an appropriate authority, staff and other accountants serving the company would be only obliged to discuss it with management and the audit committee.

“For accountants, it is not a requirement to disclose to an appropriate authority; it’s a right they are expected to exercise,” explained an official at the IESBA who preferred to remain anonymous. “We recognize the fact there are accountants at all levels within the organization,” the official added. “For an accountant in business to have a requirement to always report out might be going a little far, so that’s why we have that slightly different test.”

All this added responsibility for accountants, however, is not expected to lessen the role CFOs must play in ensuring their company’s financial reporting runs as accurately as possible.

If a finance chief is told by his or her staff accountant about a suspected illegal act, the CFO would be governed by the same code of ethics, since he or she is in the accounting reporting chain. “All professional accountants have a part to play here if they encounter a suspected illegal act. A distinguishing mark of the accounting profession is its responsibility of acting in the public interest,” the IESBA official said.

Since more companies are doing business in countries where bribery is fairly commonplace, the new obligations for accountants could become as much of a concern for companies as the Foreign Corrupt Practices Act, says Ian Ball, chief executive of the International Federation of Accountants, whose organization uses the IESBA code as a foundation for other codes of ethics. The FCPA has risen to prominence in recent years as federal government and corporate policies collide over stiff bribery penalties.

The new responsibilities for accountants and internal auditors could be controversial since they would share a greater role in detecting fraud and in preventing it. “I am expecting we will get a lot of comments on this,” says the IESBA official.

Any clarity over whose job it is to track and prevent fraud within a corporation should help, according to Jeff Leston, CEO of Castlestone Advisors, a health-care antifraud technology solutions provider.

There has, indeed, been a great deal of uncertainty over what role accountants and auditors play in disclosing fraud. “There’s always been a fine line for what the accountants’ responsibility is as far as detecting fraud. Are they supposed to report it?” asks Leston.

Market participants have until December 15, 2012, to comment on the IESBA exposure draft revisions.