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With the failure of many companies accompanied with financial scandals, there has been a growing mistrust which led to the questioning of the auditor’s role including auditor’s ethics during the audit of financial statement since the auditor has been perceived as an agent acting in public interest. The audit report is not only used by the stakeholders of the company but also it has impact on the third-party beneficiaries.

The ethical dilemma faced by accountant today is quite different from what was faced by them a few years back as the professional scope has increased manifold. The professional scope has not only widened, it has also crossed the geographical areas. Audit professionals are rendering services not only to domestic clients but also to international clients or international clients having a domestic presence.

Keeping in consideration the above-mentioned business situations and dilemma of the audit professionals, the ICAI has issued a revised Code of Ethics 2019 which is applicable from 1st April, 2020. The purpose of the Code is to promote an ethical culture in the auditing profession as the society in general including the stakeholders, bankers, income tax authorities impose tremendous trust in the profession. A code of ethics is necessary and appropriate for the profession of auditing, founded as it is on the trust placed in its objective assurance about risk management, control, and governance.

The Code of Ethics list down the fundamental principles which the auditing professionals are required to follow. The fundamental principles include:

  1. Integrity
  2. Objectivity
  3. Professional competence and due care
  4. Confidentiality
  5. Professional behaviour

The conceptual framework which helps the auditor to adhere with the fundamental principles laid down for the auditing professionals includes

  1. Identification of threats to the fundamental principles
  2. Evaluation of the threats identified
  3. Addressing the threats & reducing the threats to an acceptable level
Applicability Of Code Of Ethics For Practicing Firms

The threats as mentioned in the conceptual framework could be:

  1. Self-interest threat which could be auditor having direct or indirect financial interest in the client or quoting of reasonably low fees to obtain the engagement.
  2. Self-review threat which could be the auditor providing assurance report on the activity which he had done himself / done by network of firms
  3. Advocacy threat which includes auditor acting in favour of the client
  4. Familiarity threat which may include long association with the client or having any relationship with KMP or director of the client
  5. Intimidation threat which may include cases where the auditor may feel the pressure to agree with the judgement of the client.

The below section focuses on the Code of Ethics for the practicing firms.

Independence

A practicing auditor who is generally engaged in providing assurance services, it is very important for him to remain independent. Thus, it becomes important for the auditor to have proper evaluation & identify the circumstances before accepting any engagement. Evaluation of independence is a regular process due to changes over time in the nature of service, new interest and relationships.

The matter of independence becomes prominent if the firm is part of network of firms. The threat to independence may exist due to interests and relationships of a network firm.

 

Confidentiality

The fundamental principal of confidentiality has gained importance over a period of time specifically due to sharing of the information between network of firms, seeking guidance from third party or sharing with regulatory authorities.

Considering the above factors, it is important for an auditor to decide whether to accept the assignment or reject the same. The steps taken for either of the cases needs to appropriately documented which can also include the predecessor auditor to provide any knowledge of threat before accepting the engagement.

Professional fees or other type of remuneration including inducements

Quoting of fees is important consideration as quoting of lower or higher fees may create self interest threat. However, quoting of high or low fees per se is not unethical. However, the consideration of fees will not be applicable if the fees is decided by any regulatory body. Fees based on percentage of profit or any contingent findings, or result is any work is not allowed except in few cases like acting as liquidator, valuer for the purpose of direct tax & duties, fund raising or debt recovery services. The details of such exception can be found in Regulation 192 of The Chartered Accountant Regulations, 1988.

Inducements can be gifts, hospitality, Entertainment, Political or charitable donations, appeal to friendship or loyalty. It is basically action or situation with the motive to influence individual’s behaviour. Whether the inducement is to improperly influence the behaviour requires professional judgement. As a guideline, inducement can be acceptable, if it is part of customary or cultural practice or professional service like lunch in connection with business meeting.

Custody of client assets

Assuming the custody of client asset like money or any other assets (other than for purpose of audit) can only be done if it is permitted by any law.

Non compliance with laws & regulations of audit engagement of listed entities

It is important to understand the effect of the non-compliance of the laws and regulations directly effecting the financial statements. The non-compliance could affect the operating aspects and its ability to continue as going concern. Since the auditor is working on behalf of public interest, it is important for the auditor to communicate the non-compliance to the client at the appropriate level and appropriate time or any other regulatory authority as prescribed in any of the act or include in the auditor report (as per the requirement and case to case basis)

In case of group companies, it becomes very important for the group auditor to review the impact of non-compliance in the group financial statements.

Documentation of the non-compliance / suspected non-compliance and discussion with management / Those Charged with Governance or to the third party (as required by statue).

Following are few of the responses to queries with respect to Code of Ethics

Sl. No

Queries

Response

Reason

With respect to the services rendered by practicing auditors

1.

Undertake the management of NRI funds, portfolio management services and collecting agent or recovering agent

Become financial advisor and receive fees / commission from financial institutions.

No

Not covered in “Management consultancy & other services”

2.

Select and recruit personnel, conduct training programmes & work studies on behalf of client

Yes

Covered in “Management consultancy & other services”.

3.

Attestation of supporting documents & payroll services or teaching assignment

Yes

 
 

Equity research service & publish retain research report

Yes / No

Can practice but cannot publish report

With respect to other practicing aspects

4.

Required to obtain trade license for practicing

No

Has to be obtained if required by Govt / specified authority

5.

Management consultancy company of practicing auditor advertise its services

No

 

6.

Registered with ICAI as LLP

Yes

As per Chartered Accountants (Amendment) Act, 2011

7.

Part of AOP with other members, or other professionals

No

Only two modes of practice i.,e firms & LLPs are allowed

8.

Deemed to in service if having COP but not serving any clients

Yes

 

9.

Allow any other person to practice in his name as Chartered Accountant

No

Unless other person is also Chartered Accountant being in partnership or employed under him

10.

Pay to any person any share, commission, brokerage in fees or profit of his professional business

No

Allowed in case of member of ICAI, partner or retired partner or legal representative of the retired partner

11.

Sharing of profits with widow of the deceased partner

Yes

Partnership agreement should contain the provision for the same

12.

Entering into partnership with a

practicing Chartered Accountant of a recognized foreign professional body for sharing fee of their partnership within India

Yes

Provided they share fees of the partnership business both within India and outside India.

13.

Secure any professional business through the services of the person who is not his employee or partner

No

 

14.

Seek professional work from his professional colleagues?

Yes

 

With respect to advertisement of services

15.

Solicit clients or professional work by advertisement

No

Exceptions

a. Respond to tenders

b. Advertise change in partnership or dissolution of firm

c. Advertise for sharing professional work or for seeking professional work

16.

Engaged in Coaching/teaching activities in accordance with general and specific permission of the Council, and advertise such Coaching /teaching activities

No

May result in indirect solicitation

17.

Paid listing of firm in the telephone directory with certain privileges

No

Printing permitted under the section of “Chartered Accountant”. However, paid services for generation of leads is not permitted

18.

Indicate in book or an article, authored / contributed / published by him, his association with CA firm

No

 

19.

Solicit professional work by making roving enquiries

No

It will result in advertisement

20.

Sponsor prizes and celebrate Silver, diamond, Platinum or Centenary celebration of the firm.

Yes

 

21.

Appear on Television / Radio or give lectures at the forum?

Yes

But no reference should be given regarding name or address or services of the firm.

22.

The information contained in the website of the Chartered Accountants and/or Chartered Accountants’ firms can be circulated on their own or through e-mail or by any other mode or technique

No

· The website shall run on “Pull model” and not on “Push model”.

· Names of the client and fees charged cannot be mentioned

· Use of catchy words or phrases is not permitted

23.

WhatsApp messages for making people aware of the services rendered.

No

 

24.

Logo on letterheads, stationery etc

No

However, the common CA logo can be used

25.

Publishing advertisement in newspaper for recruitment of staff

Yes

 

Source:

  1. Revised Code of Ethics 2019 issued by ICAI
  2. FAQs on Ethical Issues issued by ICAI

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Category Audit, Other Articles by - CA Amrita Chattopadhyay 



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