Keeping on the right side of compliance

AAT has published new ethical guidance on how accountants can stay on top of compliance – here’s what it looks like in action.

Compliance should be front and centre for accountants as they go about their day jobs – that requires diligence to stay on top of regulations and changing ethical requirements.

Sadly, the accounting profession as a whole does not always achieve this goal.

Have you read AAT’s new ethics guidance?

All AAT members are bound by AAT’s Code of Professional Ethics, so have you seen the four new guidance notes?

View guidance

In 2020/21, the Financial Reporting Council (FRC) imposed £16.4 million in sanctions – an increase of £5.1 million on the previous year (read more below).

The profession is also tarnished by the poor compliance record of unregulated accountants, who make up one-third of the profession, but two-thirds of complaints to HMRC.

AAT makes clear the importance of compliance in a new guidance note – Ethics and Regulations.

“Failure to adhere to compliance has a devastating effect on multiple stakeholders including investors (fines), employees (losing jobs), consumers and suppliers. The limited liability of so many businesses has been exploited and abused. Adherence to requirements is therefore absolutely an ethical issue for professionals as ambassadors for compliance,” the guidance states.

The guidance is also clear that ‘in a world of increasing transparency, to build trust, protect reputation and attract talent, on an individual and organisational level’ accountants must report on how requirements are met through annual reports, and this is likely to increase in the future.

More than box-ticking

Natalie Moore (FMAAT), Director of PKF’s Business Outsourcing team, argues that compliance must never be a mere box-ticking exercise.

“We have a duty of care to clients, and they expect us to make sure we are providing them with the correct advice. There is an expectation that we would be doing that proactively rather than reactively; they want us to ask them lots of questions and to check in regularly,” Moore says.

PKF International’s approach is in line with the AAT code which says: “As a professional, you should strive to be doing more than the minimum and in fact adhering to legal and regulatory requirements should not even be up for debate.”

Given the seriousness of staying on the right side of compliance, professionals should put processes in place that ensure they are up to date with changing regulations.

Moore says membership of professional bodies is critical in keeping pace with fast-paced legislative change.

“I am signed up to AAT and the Association of Chartered Certified Accountants and they have a requirement to keep up with CPD. I get alerts from HMRC and trade publications all of which are very helpful in staying on top of everything.”

Moore says she sets aside time ‘at least once a month’ for compliance and will also attend webinars, which she says are a ‘great way to keep up to date’ and adds these were especially helpful during the Covid-19 pandemic.

Moore also recommends accountants build networks of experts to help them when dealing with compliance issues that fall outside their own particular field.

“I am lucky enough to work for a large organisation and I can talk to other departments with expertise that is not in my specialism,” Moore says.

Top four firm Deloitte recommends looking outside your own business for compliance advice. The thinking is that a risk assessment relies on knowledge of emerging risks and regulatory behaviour, which are not always well known within the organisation.

 “Tapping outside expertise can inform the assessment and ensure that it incorporates a detailed understanding of emerging compliance issues,” says the firm.

Jargon busting

Regulatory compliance should not be a ‘set and forget’ strategy. Instead of seeing legal, regulatory and compliance requirements as a set of rules, AAT urges accountants to match them to scenarios in their working life to bring the requirements to life.

AAT says accountants should ‘make time to discuss requirements with clients and educate them’, a recommendation Moore follows at PKF International, not only to meet compliance requirements but to build better relationships with customers.

Moore says: “It is a good opportunity to connect with clients and show where you can add value, which in turn could potentially lead to you more work.”

However, all this communication and process is of little value if those involved do not understand the terms involved. The AAT recommends developing a ‘jargon buster’ to ensure that everyone across the organisation applies a uniform meaning, while Deloitte says businesses should ‘use plain language’ and to ‘avoid absolutes and complex legal analysis’.

Accountants often form the first line of defence against breaches of compliance and their personal reputations and that of their business and clients depends on them taking regulations seriously.

However, it need not be seen as a burden and with support from senior management and membership of specialist bodies it should instead be a way to instil productivity and professionalism through an organisation.

What is compliance risk?

Compliance risk is the threat posed to a company’s financial, organisational, or reputational standing resulting from violations of laws, regulations, codes of conduct, or organisational standards of practice.

Risks of falling foul of compliance

The following is from Deloitte:

Legal impact: Regulatory or legal action brought against the organization or its employees that could result in fines, penalties, imprisonment, product seizures, or debarment. 

Financial impact: Negative impacts with regard to the organisation’s bottom line, share price, potential future earnings, or loss of investor confidence. 

Business impact: Adverse events, such as embargos or plant shutdowns, that could significantly disrupt the organisation’s ability to operate. 

Reputational impact: Damage to the organisation’s reputation or brand—for example, bad press or social-media discussion, loss of customer trust, or decreased employee morale. 

Treat the assessment as a living, breathing document. Once you allocate resources to mitigate or remediate compliance risks, the potential severity of those risks will change. The same goes for events in the business environment. All of this should drive changes to the assessment itself. 

Ethical failings behind the FRSC sanctions

The FRSC issues sanctions for serious lapses of professionalism by accountants. Last year there was a 45% increase in FRSC sanctions, often connected with massaging companies’ profitability. Here are some of the common infringements.

Fabrication of revenue streams

Some accountants were found to have fabricated revenue streams and provided false invoices to auditors, thereby allowing fictional amounts to appear in the financial statements or interim reporting, which bolstered the appearance of the company’s results.

Wrongly recognising revenue

A number of investigations found accountants recognised revenue in the financial statements when accounting standards – and even companies’ policies – did not allow it.

Recognising revenue too early

In some instances, revenue was recognised in one year when it should fall into a later year.

Inappropriate capitalisation of costs

Here accountants failed to follow the accounting standards, which set strict criteria for when costs can be capitalised or recognised as intangible assets.

Failure to account appropriately for bad debts

Several accountants tried to obscure the nature of certain losses from users of the financial statements by categorising them inappropriately.

Hidden loans and borrowings

By classifying liabilities as operational rather than financial, accountants were able to conceal company loans or borrowings.

Help with financial reporting

The AAT Knowledge Hub has a section dedicated to Financial Reporting to help members navigate pitfalls and avoid errors in this tricky area of accounting. Find out more here.

Gill Wadsworth is AAT Comment’s news writer.

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