Question

23. Do you agree that a professional accountant providing professional services to a client that is not an audit client of the firm or a network firm, who is unable to escalate a matter pertaining to an illegal act within the client, should be required to disclose the suspected illegal act to the entity's external auditor? If not, why not and what action should be taken? What about informing the SEC? Under what circumstances, if any, should the auditor consider a whistleblowing action against the client and/or the firm under Dodd-Frank?

Answer 1

Answer

If a professional accountant in public practice in the course of performing a professional service for a client that is not an audit client of the firm or a network firm acquires or receives information that leads the accountant to suspect that an illegal act has been committed, the professional accountant shall take reasonable steps as outlined in to confirm or dispel that suspicion. If the professional accountant is unable to dispel the suspicion, and if the client is an entity, the accountant shall discuss the matter with the appropriate level of management.

If, in the accountant’s professional judgment, the response to the matter is not appropriate, the professional accountant shall escalate the matter within the entity, for example with higher levels of management, internal audit or those charged with governance, If the professional accountant is unable to escalate the matter, the professional accountant shall disclose the matter to the external auditor to enable the external auditor to escalate the matter.

If in the professional accountant’s judgment, the response to the matter is not appropriate, the accountant shall determine the appropriate course of action, including whether to terminate all professional relationships with the client. When determining if the response to the matter is appropriate the professional accountant shall consider factors such as whether:

• The matter has been adequately investigated;

       • Remedial action has been taken to address the matter;

       • Steps have been taken to reduce the risk of re-occurrence, such as for example, additional controls      or training; and

       • The entity has disclosed the matter to an appropriate authority, if any, or intends to do so within a reasonable period of time.

If, the professional accountant determines that the suspected illegal act is of such consequence that disclosure would be in the public interest, there is an appropriate authority to receive the disclosure, and the matter has not been disclosed, the accountant shall advise the entity that the matter should be disclosed to the appropriate authority. If the entity has not made an adequate disclosure within a reasonable period of time and the suspected illegal act relates to the subject matter of the professional services being provided by the professional accountant, the accountant shall disclose the matter to the appropriate authority, when not prohibited by law.

If the client is an individual and the professional accountant is unable to dispel the suspicion, the accountant shall discuss the matter with the individual. If the client admits to the illegal act the professional accountant shall advise the client to disclose the matter to an appropriate authority, if there is an appropriate authority to receive the disclosure. If the client refuses to disclose the matter, or does not admit to the illegal act, the professional accountant shall determine the appropriate course of action, including whether to terminate the professional relationship with the individual. If the professional accountant determines that the suspected illegal act is of such consequence that disclosure would be in the public interest and the subject matter of the illegal act falls within the expertise of the professional accountant, the accountant shall disclose the matter to an appropriate authority, when not prohibited by law.

In exceptional circumstances a professional accountant in public practice is not required, under this section, to disclose the suspected illegal act if a reasonable and informed third party would conclude that the probable threats, harassment or reprisals to the professional accountant are sufficiently severe to outweigh the public interest in disclosure. In such cases, if the professional accountant determines not to disclose the suspected illegal act, the accountant shall document the rationale for not disclosing.

Protection under Legislation

The professional accountant may wish to seek legal advice to obtain an understanding of any protection afforded by legislation, such as that afforded in some jurisdictions under whistle-blowing legislation, if the accountant discloses the matter to a party outside of the client.

Whistle Blowing:

It is the act of informing the outsiders of the company about any illegal acts or frauds of the company once they are known to a person the act of whistle blowing helps a fair presentation of the company

Documentation

The professional accountant shall document the steps the accountant took to respond to the suspected illegal act. The documentation shall include the persons consulted,responses received, the disclosure, if any, made to an appropriate authority and if the professional accountant determined not to disclose the suspected illegal act, the accountant shall document the rationale for not disclosing.