Regulatory updates

Over the last few years, investors and other stakeholders have increased their focus on non -financial information and other metrics that provide a better understanding of a company’s long - term value creation. Consequently, financial markets have witnessed accelerated growth in the disclosure of sustainability and Environmental, Social and Governance (ESG) information.

The accountancy profession plays an important role in preparation, presentation and assurance of the sustainability reporting. However, in recent years, there has been a rise in concerns regarding reporting of false or misleading sustainability information (i.e., greenwashing). In this regard, on 21 October 2022, the International Ethics Standards Board for Accountants (IESBA) released a Questions and Answers (Q&A) publication highlighting the relevance and applicability of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) in combatting greenwashing. The Q&As discuss various ethics -related challenges arising from Professional Accountants' (PAs) involvement in sustainability reporting and assurance. Some of the key concepts and metrics discussed in the publication include:

• Greenwashing – Meaning: The term ‘greenwashing’ hasn’t been used or defined in the Code. However, this term usually refers to practices that involve misleading the intended users of information, or intentionally giving them a false impression about how well an organisation or an investment is aligned with its sustainability goals. There are various factors which could contribute to greenwashing, including:

• Availability and quality of corporate sustainability data
• Lack of integration and connectivity between the financial and non-financial sustainability information
• Incentives and opportunities (e.g., financial or reputational) to promote more sustainability aligned products, or to promote the business as being aligned to sustainability goals and trends
• Lack of regulation or regulation which is at the nascent stage of development, etc.

• Applicability of the Code to sustainability information : The Code lays down various principles with respect to the preparation and presentation of information. In addition to preparing and presenting financial information, the PAs must comply with these principles for non -financial information as well, including sustainability information presented in the form of standalone sustainability reports, annual or integrated reports, or information presented on a company’s website. This includes complying with the five fundamental principles of the Code, namely – integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

In particular, the following overarching requirements in the Conceptual Framework of the Code are relevant in producing sustainability information:

• Having an inquiring mind
• Exercising professional judgement, and
• Using a reasonable and informed third-party test.

• Professional competence and experience: A PA should be professionally competent and should have the relevant expertise and experience when dealing with sustainability reporting requirements. If the PA does not have the relevant sufficient expertise, it would result in creation of a selfinterest threat. In order to address this self-interest threat, PAs should consider obtaining assistance or training from someone with the necessary expertise. However, if the selfinterest threat cannot be addressed, paragraph R230.4 of the Code requires the PA to consider declining the performance of his/her duties in question, in such cases the reasons for such decline should be communicated.
• Verifying sustainability information: The application of the Conceptual Framework of the Code requires the PAs to not accept the sustainability information at face-value. He/she should:

• Consider the source, relevance and sufficiency of the information obtained, taking into account the nature, scope and outputs of the professional activity being undertaken
• Being open and alert to a need for further investigation or other action
• Consider other factors such as the emergence of any new information, changes in facts and circumstances, any inconsistency between the known facts and circumstances, and so on.

• Responsibility of the PA in case of NOCLAR: If a PA becomes aware of any information which suggests that there has been any Non-Compliance with Laws and Regulations (NOCLAR), he/she should comply with the NOCLAR²¹ provisions set out in Section 260 of the Code.
• Misleading sustainability information: When a PA knows, or has reason to believe, that the sustainability information they are associated with is misleading, the Code requires the accountant to take appropriate actions to resolve the matter. Following points should be considered as per paragraph 220.8 A1 of the Code:

• Discussing concerns with his/her superior and/or the appropriate level(s) of management within the employing organisation or TCWG, and requesting such individuals to take appropriate action to resolve the matter
• Consulting the policies and procedures of the employing organisation, such as an ethics or whistleblowing policy, on how to address such matters internally
• If after taking the above action, no corrections have been made in the sustainability information, then the PA should take further actions which might be appropriate, such as:

• Consulting with the relevant professional body, the internal or external auditor of the employing organisation, or the legal counsel,
• Determining if there’s any requirement to communicate to the third parties, including users of the information, regulators and other oversight authorities,
• If, after exhausting all other options, the PA determines that appropriate action has not been taken and there is a reason to believe that the sustainability information is misleading, he/she must refuse to remain associated with the information. In such circumstances, the Code notes that it might be appropriate for the PA to resign from the employing organisation.

• Pressures to meet ESG goals: Individuals involved in preparation, presentation and reporting of sustainability information might experience pressure to report misleading sustainability information or make false claims regarding certain products or projects, etc. to meet investors’ and other stakeholders’ expectations. Pressure could be explicit or implicit and might come from within the employing organisation or be driven by internal and external expectations. In such cases, the PA should understand and consider discussing the circumstances creating the pressure in order to evaluate the level of threats to compliance with the fundamental principles and obtain consultations from superiors, legal counsels, or relevant professional or regulatory bodies. Appropriate disclosures may also be made as per the employing organisations’ ethics and whistle-blowing policies.
• Communication with TCWG: Effective communication with TCWG provides enhanced transparency and contributes to promoting an ethical culture in an organisation, especially when leaders within the organisation hold themselves and others accountable for demonstrating ethical values. PAs should determine the appropriate individual(s) within an organisation with whom they can communicate, especially pertaining to situations where there are increased risks of greenwashing, such as:

• Pressure to breach the fundamental principles of ethics
• Association with misleading information
• Actual or suspected NOCLAR.

To access the text of the publication, please click here

21. NOCLAR comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations. The non-compliance could be committed by any of the following parties:
    • The professional accountant’s employing organisation,
    • Those Charged With Governance (TCWG) of the employing organisation,
    • Management of the employing organisation, or
    • Other individuals working for or under the direction of the employing organisation.
22. Market capitalisation is calculated as on the 31st day of March of every financial year.

Russia’s military invasion of Ukraine in February 2022 has given rise to unprecedented challenges for businesses and organisations in the public, private and non-profit sectors across the globe. This has resulted in significant increase in volatility and uncertainty in the financial markets. Additionally, various jurisdictions have imposed wide-ranging economic sanctions on Russia and Belarus and certain Russian entities and individuals. Owing to the potential of further market disruptions and uncertainties, and in order to highlight the PA’s responsibility with regard to the sanctioned entities/individuals, on 3 October 2022, IESBA issued an alert highlighting the key ethics and independence considerations for Professional Accountants (PAs) in relation to Russia-Ukraine war.

The alert draws attention of the Professional Accountants in Business (PAIBs) and Professional Accountants in Public Practice (PAPPs) to key principles of the Code, which are important to enable them in complying with the ethical obligations and meet their responsibility to act in public interest. Some of the key considerations issued in this regard include:

• Understanding and complying with the sanctions: In the present context, PAs whose employing organisations or clients have, or are likely to have, business dealings with entities or individuals in Russia and Belarus must keep abreast with the scope and impact of any applicable sanctions. PAIBs should keep their employing organisations’ client base under review and take appropriate steps, if required to avoid breaching sanctions, including potentially ending business or client relationships. PAs should also keep an eye for any new sanctions that may be imposed and evaluate how it would impact the PAPP’s clients or the PAIB’s business transactions.
• Inquiries: PAs should have an inquiring mind when applying the Conceptual Framework of the Code. This involves considering the source, relevance and sufficiency of information obtained, taking into account the nature, scope and outputs of the professional activity, and being alert to a need for further investigation or other action by the regulators. PAs may encounter situations where they are asked for assistance in moving assets abroad. In such situations, PAs should apply professional skepticism and consider questions regarding the background of the customer or client, the nature and purpose of the business transaction, identity of the ultimate beneficiaries of the transaction, and so on.
• NOCLAR instances: The economic disruptions and social upheaval caused by the Russia-Ukraine war have created numerous opportunities for fraud, money laundering and other criminal activities. This may further result in instances of NOCLAR or suspected NOCLAR through a breach of sanctions laws and regulations by the employing organisations or clients. Thus, both PAIBs and PAPPs must ensure compliance with the provisions of Section 260²³ and 360²⁴ of the Code respectively.
• Client and engagement acceptance: Section 320²⁵ of the Code highlights the importance of understanding and knowing a proposed client before accepting a professional appointment. It also explains that threats to compliance with the principles of integrity or professional behavior might be created from questionable issues associated with a client (its owners, management, or activities). Thus, in the context of the present scenario, such threats might be created in circumstances that involve a professional service to a potential client in Russia or Belarus or a client with business interests in those countries to evade sanctions, laws and regulations.
• Inducements: PAs should be aware that there is an increased risk of bribery and corruption due to the sanctions imposed on certain Russian entities and oligarchs. Sanctioned entities/individuals might be tempted to offer bribes to PAs in jurisdictions where they have moved significant capital and acquired significant assets to conceal their existence or otherwise seek to avoid their seizure. PAIBs and PAPPs should refer to appropriate guidance in the Code in navigating situations involving inducements.
• Preparation and presentation of information: While preparing the employing organisation’s financial statements, PAIBs should ensure that the impact of the Ukraine conflict on their employing organisation’s business is appropriately accounted for and disclosed even when doing so leads to reporting unfavorable information. When a PAIB knows or has reason to believe that the information disclosed by their employing organisation is misleading, the PAIB should take appropriate action as prescribed by the Code.
• Overdue fees: In the context of an audit of financial statements, firms having audit clients based in Russia or Belarus or clients with significant business in those countries must take into consideration the overdue fees provisions, as enunciated in Section 410²⁶ of the Code. It also explains that the level of the self-interest threat to independence might be impacted if fees payable by an audit client for the audit or other services are overdue during the period of the audit engagement. In cases where a significant part of the fees due from an audit client remains unpaid for a long time, it must be determined whether:

• The overdue fees might be equivalent to a loan to the client, or
• It is appropriate for the PA’s firm to be re-appointed or continue the audit engagement.

To access the text of the IESBA alert, please click here

23. Section 260 of the Code specifies provisions with regard to instances of NOCLAR or suspected NOCLAR in case of PAIBs.
24. Section 360 of the Code specifies provisions with regard to instances of NOCLAR or suspected NOCLAR in case of PAPPs.
25. Section 320 of the Code specifies provisions with regard to professional appointments
26. Section 410 (Revised), Fees (effective for audits of financial statements for periods beginning on or after 15 December 2022)

In April 2023, the International Ethics Standards Board for Accountants (IESBA) released final revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code). These revisions increase the Code’s robustness and expand its relevance in a world being fundamentally reshaped by rapid technological advancements and accelerating digitalisation.

These technology-related revisions will guide the ethical mindset and behavior of professional accountants in both business and public practice as they take advantage of the opportunities created by technology and adapt to new technology. Developed to remain relevant and applicable in the ever-evolving landscape of technology transformation, the revisions apply to the use of any technology, including to the extent possible, future technologies.

The revisions mainly include the following:

• Strengthen the Code in guiding the mindset and behavior of professional accountants when they use technology
• Provide enhanced guidance fit for the digital age in relation to the fundamental principles of confidentiality, and professional competence and due care, as well as in dealing with circumstances of complexity
• Strengthen and clarify the International Independence Standards (IIS) by addressing the circumstances in which firms and network firms may or may not provide a technology-related non-assurance service to an audit or assurance client.

The revisions to the IIS will be effective for audits and reviews of financial statements for periods beginning on or after December 15, 2024. The other revisions to the ethics provisions of the Code will be effective as of December 15, 2024. Early adoption is permitted.

To access the text of the revisions to the Code, please click here