From the CPABC Ethics Team
Members who provide audit, review, and compilation engagement services may not have a statutory responsibility to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, but they do have a responsibility to be vigilant with regard to unusual transactions. If you perform these services and encounter circumstances that suggest money-laundering activities, you should be aware of the increased risk of misstatements in the financial statements and other forms of fraud. Most of all, you should consider the impact on your reputation and the possible legal implications.
What to do when you encounter an unusual transaction
You’ve encountered a “suspicious” or “unusual” transaction—what next? There is no single answer for every situation, but it is always advisable to seek a better understanding of the transaction by talking to management or those charged with governance. If the explanation removes elements of suspicion, the matter can be documented and the issue can be resolved. If the discussion does not resolve the matter, you may need to consider issuing a qualified report or resigning from the engagement—it may also be appropriate to seek legal advice.
Other steps to consider are specific to the nature of the engagement. If you encounter unusual circumstances during an audit, for example, be sure to review Canadian Auditing Standard (CAS) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, in the CPA Handbook – Assurance.
If you encounter unusual circumstances while performing a review, consider whether these circumstances cast doubt as to the plausibility of the financial information. Also, consider performing additional procedures as suggested for an audit.
If you’re performing a compilation and the circumstances lead you to believe that the financial statements are false or misleading, request additional information and/or revisions. If neither are forthcoming, consider not releasing the statements and resigning from the engagement.
FINTRAC’s unusual transaction indicators
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) provides a number of resources and tools online, including lists of common indicators that may point to suspicious transactions.
Here are some examples of indicators from the financial transaction, client behaviour, and odd situation categories:
- A large foreign currency exchange transaction does not match the client’s job or organization profile.
- Money is being transferred to an individual or organization that the client doesn’t know, or care to know.
- Money transfers are being sent to free trade zones that are not in line with regular activity.
- The client is hesitant to give an explanation or details about a transaction or third party.
- Explanations don’t make sense.
- A stated business transaction does not correspond with logic (for example, a food exporter is dealing with an automobile parts exporter).
- No explanation is given for the size of a transaction or cash volumes.
- The situation involves a non-profit or charitable organization for which there appears to be no logical link between the stated activity of the organization and the other parties in the transaction.
Guidance in the CPA Handbook – Assurance
The CAS 240 section of the handbook also provides good reference material, and not just for audit engagements. Firstly, fraud is defined as “An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.”
The section also includes examples that are reflective of those provided by FINTRAC. For example:
- Professional Skepticism, paragraph 14: “Where responses to inquiries of management or those charged with governance are inconsistent, the auditor shall investigate the inconsistencies.”
- Unusual or Unexpected Relationships Identified, paragraph 22: “The auditor shall evaluate whether unusual or unexpected relationships that have been identified in performing analytical procedures, including those related to revenue accounts, may indicate risks of material misstatement due to fraud.”
- Audit Procedures Responsive to Risks Related to Management Override of Controls, paragraph 32(c): “For significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual given the auditor’s understanding of the entity and its environment and other information obtained during the audit, the auditor shall evaluate whether the business rationale (or lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.”
Resigning from an engagement
If you resign from an engagement, additional questions may arise when you are then required to respond to a takeover letter from the successor accountant. In such cases, refer to rule 302 (Communication with predecessor) of the CPABC Code of Professional Conduct (CPA Code) and the relevant guidance, which suggest the following approach:
- Because you are aware of unusual circumstances that might influence the successor in deciding whether to accept the engagement, you must first consider the matter of confidentiality.
- If these circumstances cannot be disclosed due to confidentiality, your response should note that, in your opinion, there are circumstances that should be taken into account but that cannot be disclosed without the client’s consent.
- Where confidentiality is in doubt, you should consider obtaining legal advice.
Additionally, if you are the successor accountant, refusal of permission from the client is obviously a factor you should consider when making the decision to accept a client.
Maintain your professional skepticism
Whatever the circumstances, the key is always to maintain your professional skepticism—have a questioning mind, be alert to conditions that may indicate possible misstatement due to error or fraud, and make a critical assessment of evidence.
- More information on money laundering is provided in CPABC’s New & Views Knowledge Base at bccpa.ca/news-views-kb.
- Members are advised to obtain legal advice whenever they have doubts about legal implications.
- The guidance provided by CAS 240 is consistent with the messaging from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).