Non-compliance with Laws and Regulations (NOCLAR) poses significant risks to organisations, challenging the integrity of financial reporting. Accountants have a crucial role in identifying and addressing NOCLAR to uphold trust and financial compliance practices. This article delves into the frameworks governing accountants' responsibilities and outlines the procedures accountants should follow when confronting instances of NOCLAR.

What is NOCLAR

NOCLAR refers to any actions or suspected actions that do not adhere to applicable laws and regulations. This includes any such activities encountered or discovered by an accountant within the organisation. These non-compliant activities can be committed by employees, management, those in governance roles, or any third parties under the organisation’s control. NOCLAR encompasses both deliberate acts and those of oversight, and it applies to local as well as international laws and regulations.

NOCLAR can have significant direct and indirect effects on an organisation's financial statements. These include the need for costly financial restatements to correct previously reported figures, legal penalties that reduce profits, and a loss of investor confidence that can lead to a sharp decline in share prices. Additionally, a company's reputation may suffer, potentially deterring investment and damaging relationships with creditors, which could result in lost business opportunities. Operational disruptions may also occur as resources are diverted to address legal and compliance issues, hindering business growth.

Frameworks Governing the Work of Accountants

• The IESBA Code of Ethics (Code): This international standard outlines the ethical responsibilities of accountants, emphasising integrity, objectivity, professional competence, confidentiality, and professional behaviour. The Code mandates accountants to identify, evaluate, and address threats to compliance, including NOCLAR.

• Companies Act: provides legal guidelines that affect the preparation of financial statements and corporate governance. It requires financial statements to fairly present the state of affairs and financial results, which accountants must ensure.

• Financial reporting frameworks i.e. IFRS for SMEs require accountants to ensure that financial reporting under this framework is free from material misstatement, whether from fraud or error.

Responsibilities of Accountants regarding NOCLAR

• Identification and Assessment

  Accountants must use their professional judgment to identify signs of NOCLAR and assess its impact on financial reporting and the organisation's operations. For example, when an entity has a future obligation for an environmental cleanup, the contingent liability should be correctly disclosed in the financial statements. The starting point is to identify relevant regulations that may have a financial impact. The following are examples of NOCLAR:

  • Tax Evasion: Discovering that the company has intentionally underreported taxable income.

  • Violations of Environmental Laws: Identifying that the company has been disposing of hazardous waste contrary to legal requirements, which could have financial implications through fines and penalties.

  • Breach of Employee Safety Laws: Finding that the company has not adhered to workplace safety laws, potentially leading to penalties or significant legal settlements.

•  Action and Reporting

  Upon discovering NOCLAR, accountants should first alert management and, if necessary, governance bodies. If the issue is severe and not remedied internally, further reporting to external authorities may be required. The consequences of NOCLAR i.e. penalties and fines, future lawsuits or liabilities should be appropriately disclosed.

• Documentation

  Keeping detailed records of NOCLAR findings, discussions, and actions taken.

Steps to Follow When Confronting NOCLAR

1. Awareness: Recognise the issue when encountered during regular activities, without actively seeking it out.

2. Understanding and Consultation:

   • Assess the nature of the act and the surrounding circumstances.

   • Discuss the issue with management to understand their perspective and possible corrective actions.

   • Consider seeking advice from legal counsel to clarify legal implications and appropriate responses.

3. Addressing the Issue:

   • Work with the organisation to rectify, remediate, or mitigate the effects of the non-compliance.

   • Implement measures to deter future occurrences.

   • Ensure that all relevant disclosures are made, particularly if the issue affects financial statements.

4. Communication:

   • Communicate findings and actions to relevant groups, especially in the context of a financial statements audit, to ensure transparency and understanding.

5. Evaluation of Further Actions:

   • Assess whether the entity's response to the issue is timely and appropriate.

   • Consider the need to withdraw from the engagement if the response is not satisfactory or if continued association could harm the accountant's professional integrity.

6. External Reporting Decision:

   • Decide whether it is necessary to disclose the matter to an appropriate authority, based on the severity of the issue and legal requirements.

7. Documentation:

   • Document all findings, discussions, actions taken.

Example in a South African Context:

In a South African context, consider an example where an accountant at a manufacturing company discovers that the company has been discharging industrial waste into local waterways, violating the National Environmental Management Act. Upon identifying this non-compliance with laws and regulations (NOCLAR), the accountant first reports the issue to the company's management and the board of directors, emphasising the potential risks such as environmental harm, legal penalties, and reputational damage.

If the company fails to address this violation internally—perhaps by continuing their harmful discharges despite the accountant's warnings—the accountant is then compelled to report the issue to external authorities. In this case, the appropriate authority would be the Department Forestry, Fisheries and the Environment, or the relevant local government body responsible for environmental oversight.

This external reporting would likely initiate a formal investigation and could result in substantial fines, legal sanctions, and orders to remedy the environmental damage, all of which would need to be disclosed in the company’s financial statements under liabilities or contingent liabilities. This scenario illustrates the essential role that accountants play in enforcing legal and ethical standards, ensuring corporate accountability and transparency in environmental matters.

Manage your clients’ NOCLAR responsibly and effectively using CIBA’s NOCLAR Evaluation Procedures for Accountants

Use the procedures below when considering NOCLAR for your clients to ensure that the issues are considered responsibly and effectively.

Learn how to evaluate NOCLAR for your clients with CIBA’s CPD course on Ethics, Non-Compliance With Laws And Regulations (NOCLAR) 2024

What you will learn

By attending this webinar you will gain the following competencies:

• Understand the Concept of Non-Compliance with Laws and Regulations (NOCLAR)

• Understanding who is responsible for identifying and possibly reporting a NOCALR

• Acquire Insight into the Prescribed Procedures Upon Becoming Aware of a NOCLAR.

• Illustrative examples of NOCLAR Scenarios.

• Understanding Reporting Obligations in Accordance with Legal Mandates and Ethical Standards.