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THE DRAFT ICAI CODE OF PROFESSIONAL ETHICS –THE SHAPE OF THINGS TO COME
Presentation by
CA Atul C Bheda
4i Committee
Bombay Chartered Accountants` Society
Power SummitNetworking Within and Across Professions
WHY ETHICS
One may doubt as to why ethics, when there is law?
Ethics is required to encourage people to maintain rightfulprofessional conduct , though law is mainly to punish non –compliance of conduct prescribed. Ethics is thus morepositive in character.
Ethics encompasses public conscience, and surpassesexpectations as posed from law.
Ethics often forms the basis of law. A distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the publicinterest
2
ETHICS IN ACCOUNTANCY
Ethics in the profession of accountancy areinvaluable to the members of the profession and tothose who rely on their services. The stakeholdersare many - clients, credit grantors, governments,taxation authorities, employees, investors, thebusiness and financial community and the generalpublic.
IFAC has established the International EthicsStandards Board for Accountants (IESBA) tofunction as an independent standard-setting bodyunder the auspices of IFAC . The IESBA developsethical standards and guidance for use byprofessional accountants. It encourages memberbodies to adopt high standards of ethics for theirmembers and promotes good ethical practicesglobally. The IESBA also fosters international debateon ethical issues faced by accountants. 3
ICAI : COMPLYING WITH ETHICS SINCE
INCEPTION The Chartered Accountants Act was passed in 1949 with a
view to regulate the profession of accountancy in India. ICAIwas also established in the same year for administration of theAct. Accounting, auditing and ethical standards are formulatedand monitored for compliance under the provisions of the Actby the ICAI.
The CA Act and the Schedules appended to the Act set outthe permissible norms for the members of the profession. Thetwo Schedules spell in detail the various acts and omissionsentailing professional/other misconduct , which are dealt withpunishment in accordance with Chapter-V of the Act. Asregards quality control, the Institute has the responsibilityunder Section 15 of the Act to ensure quality of standards ofperformance of its members. The Disciplinary mechanism ofthe Institute is provided in the Act, and thus with thesanction of law behind , it has effectively been followed sincethe enactment of the Act without any difficulty .
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CODE OF ETHICS – TRANSCENDING
THROUGH STAGES
The Chartered Accountants Act – Precursor to Code of Ethics.
Code of Conduct for members (First edition in November, 1963)
The „Code of Conduct‟ was called as „Code of Ethics‟ for the first time in its ninth edition in 2001.
Today‟s Code of Ethics(2009) is the 11th edition of the Code. It is also the first edition after convergence with IFAC.
5
CODE OF ETHICS, 2009 - STRUCTURE
Divided in two parts:-
Part A : Based on IFAC Code of EthicsPart B: Based on the Chartered Accountants Act,1949
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BASIC PRINCIPLES
7
Sr. PARTICULARS PART – A PART - B
1 Approach Principle based Rule based
2 Framework Conceptual
framework based on
general principles.
Based on legal
framework as per CA
Act, 1949.
3 Authority It suggests basic
principles in modular
form along with
examples as
guidelines of the
Council.
Authority founded in
specific Statute
4 Enforceabilit
y
Professional
Accountants to see
enforceability
themselves.
Inbuilt mechanism for
its enforcement is in
place
FUNDAMENTAL PRINCIPLES
Integrity
Objectivity
Professional Competence and Due
Confidentiality
Professional Behaviour
INTEGRITY
CA to be straightforward and honest Professional work must not be influenced by self –
interest or interest of other parties Examples
CA in practice – When a CA knows that financialstatements are materially misstated he should notexpress a true and fair view on such financialstatements.
CA in employment - A CA employed in a limitedcompany run by one director discovers that someemployees are paid in cash instead of formal payrolland some people are being employed illegally andthere are no records of formal employmentdocuments or contracts. The CA should bring out thisfact to the statutory auditors.
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OBJECTIVITY
Should not allow bias, conflict of interest orundue influence of others to overrideprofessional judgments.
Examples CA in practice – A CA should not accept gift of
significant value from a client in exchange ofchanging his opinion on financial statements.
CA in employment - A CA employed as directorin a large services company, the CEO of thecompany is a very dominant character and exertsundue influence in running the company illegally.The CA perceives threats to his objectivity dueto the CEO‟s behavior. 10
PROFESSIONAL COMPETENCE AND DUE CARE
Duty to maintain professional knowledge and skill currentand at a level necessary to perform professional duties.
Examples CA in practice - A CA should perform audit in accordance
with the SAS issued by ICAI and relevant laws applicableto the client.
CA in employment - A CA employed as a financial controllerat manufacturing company finds that the company iscreating higher profit margins by inflating sales, thuscausing potential threat that could push the company intoinsolvency and result in huge job losses. The CA shoulddeclare this information to tax authorities, as required bylaw, and follow the fundamental principle of professionalcompetence, due care and diligence. 11
CONFIDENTIALITY
Maintain confidentiality of information acquired in courseof performing duties and disclose such information onlywhen specific authority form the client or a duty under law
Examples CA in practice – A CA acquires information which can
effect a legal case pending against the client in a court oflaw. The CA can refuse to disclose this information to athird party unless there is duty under law to make suchdisclosure.
CA in employment - A CA is financial director of a largeMNC and is privy to information about a takeover bid toacquire a rival firm. The CA to refrain from disclosing theinformation to a family friend who is considering to sellshares in the rival organisation. 12
PROFESSIONAL BEHAVIOUR
Comply with relevant laws and regulations and should avoidany action that discredits the profession.
Example CA in practice – A CA does not file his income tax return
or pay taxes due from him has compromised thefundamental principle of professional behaviour.
CA in employment - A CA employed as finance head of asmall family owned Pvt Ltd Company. The Board ofDirectors comprised of family members and one familymember is MD of the company. The Board decided thatpayment of pension contributions of deceased Chairman tobe made to his brother and directed the CA to carry outthe orders. The MD advised CA not to carry the directionsof the Board. By not agreeing to the MD, the CA iscomplying with his professional duty of carrying out thedirections of the Board of directors. 13
Conceptual Framework Approach
14
Reduce Threats
Apply safeguards
Accept
Not possible to reduce threats
Decline
Threat Evaluation
THREATS
Self – Interest Threat
Self – Review Threat
Advocacy Threat
Familiarity Threat
Intimidation Threat
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EXAMPLES OF THREATS – SELF – INTEREST
THREAT
Self – Interest threat may arise in a situationwhere the CA has a vested interest in anoutcome, over which the CA has some degreeof influence or control. It in not limited topurely financial interests.
For Example - A self-interest threat arises when a CA holds
direct financial interest in the client orobtains material loan from the client or
A CA is working on something which has theability to influence his child‟s education or afriend‟s healthcare, thus giving rise to avested interest in the outcome. 16
SELF – REVIEW THREAT & ADVOCACY
THREAT
A self – review threat created when a CA is called on tocheck, audit or approve a piece of work he was involved inoriginating.
For Example – A CA is asked to audit the books ofaccounts which have been prepared by him. A self – reviewthreat is created.
Advocacy threat created where a CA takes on a rolerepresenting a client‟ or pushing the client‟s interest inanother context.
For Example – A CA may be asked to promote client‟ssecurities as part of IPO. The CA should not make false ormisleading statements or present judgement as fact, thusavoiding advocacy threat.
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FAMILIARITY THREAT & INTIMIDATION
THREAT
Familiarity threat is created where, due to relationship,client is in a position to influence the work of CA
For Example - The spouse of the CA (auditor) is the CEOin the client company. A familiarity threat to fundamentalprinciple of objectivity is created as the opinion expressedby the CA may be biased due to personal relations.
Intimidation threat created where someone can exercisedisproportionate pressure by being in a position of powerand influence.
For Example - An large audit client indicates that it willnot award planned non-attest services to the audit firm ifthe latter continues to disagree with client‟s accountingtreatment for a particular transaction
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Division S n Division Name
Existing =>
Part A IFAC Code
--------- Introductory Part B AS SA
Division I The CA Act,
1949
The CA Act,
1949
Division II: The First
Schedule
The First
Schedule
Division III The Second
Schedule
The Second
Schedule
Division IV Rules under the
CA Act, 1949
Council
Guidelines
Division V The CA
Regulations,
1988
Self Regulatory
Measures
Division VI Guidelines ,
2014
Appendices
-------- Appendices
Division Sr.n. Division Name
--------- Introductory
Division I The Chartered Accountants Act, 1949
Division II: The First Schedule
Division III The Second Schedule
Division IV Rules framed under the Chartered
Accountants Act, 1949
Division V The Chartered Accountants
Regulations, 1988
Division VI Guidelines , 2014
-------- Appendices
INTRODUCTORY
Introduced For The First Time
Gives an introduction to the entire Code
Meaning and significance of ethics,
Importance of Code of Ethics forprofessionals
Overview of the accounting profession inIndia,
Overview of the Chartered AccountantsAct, Rules, Regulations, and guidelines.
DIVISION ITHE CHARTERED ACCOUNTANTS ACT, 1949
Commentary for all the sections of the CharteredAccountants Act, 1949.
The Code of Ethics, 2009 contained commentary onlyto a few sections of the Act.
DIVISION IITHE FIRST SCHEDULE
Explanation to all the items under differentParts of the First Schedule along with therelevant disciplinary cases.
An attempt has been made to update the2009 edition of the Code by incorporatinglandmark disciplinary cases of the DisciplinaryCommittee/ Council / High Courts post 2008.
A universal change of substituting the word„clause‟ with the word „item‟ has been carriedout in the entire division.
DIVISION IIITHE SECOND SCHEDULE
Explanation to all the items underdifferent Parts of the Second Schedulealong with the relevant disciplinary cases.
An attempt has been made to update the2009 edition of the Code by incorporatinglandmark disciplinary cases of theDisciplinary Committee/ Council / HighCourts post 2008.
A universal change of substituting theword „clause‟ with the word „item‟ has beencarried out in the entire division.
DIVISION IVCOMMENTARY ON RULES FRAMED UNDER THE
CHARTERED ACCOUNTANTS ACT, 1949
Introduced For The First Time
Explanation/commentary on all the Rules
The Chartered Accountants (Election to theCouncil) Rules, 2006.
The Chartered Accountants (Nomination ofMembers to the Council) Rules, 2006
The Chartered Accountants (Election Tribunal)Rules, 2006
DIVISION IV ………COMMENTARY ON RULES FRAMED UNDER
THE CHARTERED ACCOUNTANTS ACT, 1949
The Chartered Accountants (Procedure ofInvestigations of Professional and OtherMisconduct and Conduct of Cases) Rules, 2007
The Appellate Authority (Allowances payable to,and other terms and conditions of service ofChairperson and members and the manner ofmeeting expenditure of the Authority) Rules,2006
The Chartered Accountants (Procedures ofMeetings of Quality Review Board, and Termsand Conditions of Service and allowances of theChairperson and members of the Board) Rules,2006
DIVISION V: THE CHARTERED ACCOUNTANTS
REGULATIONS, 1988
Introduced For The First Time
Explanation/commentary on all theregulations forming part of theChartered Accountants Regulations,1988.
DIVISION VIGUIDELINES , 2014
A very important part of the Code
Provides all the Guidelines applicable to themembers at one place.
Incorporates the IESBA Code of Ethics, 2013with necessary modifications as well as domesticguidelines governing the members.
All the guidelines incorporated in this divisionare mandatory in nature except otherwisementioned.
DIVISION VI: GUIDELINES, 2014
Chapter I :„Framework for professional Ethics‟(„Framework‟ in short), containing provisionsadopted and incorporated from the InternationalEthical Standards Board for Accountants(IESBA) Code of Ethics, 2013.
Chapter II : General
Chapter III : Advertisement
Chapter IV : Website
DIVISION VI: GUIDELINES 2014….
Chapter V : Corporate Form of Practice
Chapter VI : Logo
Chapter VII : Conversion of a CA Firm into LLPs
Chapter VIII : Networking
Chapter IX : Self Regulatory Measures
PART A―GENERAL APPLICATION OF THE CODE
Section 100 Introduction and Fundamental Principles
Section 110 Integrity
Section 120 Objectivity
Section 130 Professional Competence and Due Care
Section 140 Confidentiality
Section 150 Professional Behavior
PARTS B AND C
Describe the conceptual framework in certain situations.
Provide examples of safeguards that may be appropriate to address threats
Describe situations where safeguards are not available to address the threats
Part B applies to professional accountants in public practice.
Part C applies to professional accountants in business..
PART B―PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
Section 200 Introduction Section 210 Professional Appointment Section 220 Conflicts of Interest Section 230 Second Opinions Section 240 Fees and Other Types of Remuneration Section 250 Marketing Professional Services Section 260 Gifts and Hospitality Section 270 Custody of Client Assets Section 280 Objectivity―All Services Section 290 Independence―Audit and Review
Engagements Section 291 Independence―Other Assurance
Engagements
PART C―PROFESSIONAL ACCOUNTANTS IN BUSINESS
Section 300 Introduction
Section 310 Potential Conflicts
Section 320 Preparation and Reporting of Information
Section 330 Acting with Sufficient Expertise
Section 340 Financial Interests
Section 350 Inducements
MAJOR PROPOSALS
The Code introduces a new definition of„Public Interest Entities‟ (290.25).
Introduces a new term „Key Audit Partner‟
New section dealing with „ManagementResponsibilities‟.
New provisions relating to threats that arecreated by certain tax services
Know Your Client (KYC) Norms.Recommendatory for attest function clients
Conflicts of Interest
MAJOR PROPOSALS
Acceptable level
Engagement team
The current Section 290 (Independence–Assurance Engagements) has been split into two sections: [MOST BULKY CHANGE]
Section 290 – Independence ―Audit and review engagements
Section 291 – Independence ―Other assurance engagements
PUBLIC INTEREST ENTITIES
All listed entities; and
Any entity:
Defined by regulation or legislation as apublic interest entity; or
For which the audit is required by regulationor legislation to be conducted in compliancewith the same independence requirementsthat apply to the audit of listed entities.Such regulation may be promulgated by anyrelevant regulator, including an auditregulator.
KEY AUDIT PARTNER
The engagement partner, the individualresponsible for the engagement quality controlreview, and other audit partners, if any, on theengagement team who make key decisions orjudgments on significant matters with respect tothe audit of the financial statements on which thefirm will express an opinion. Depending upon thecircumstances and the role of the individuals onthe audit, “other audit partners” may include, forexample, audit partners responsible forsignificant subsidiaries or divisions.
KEY AUDIT PARTNER
Audit Clients that are Public Interest Entities
Familiarity or intimidation threats are created when a key audit partner joins the audit client that is a public interest entity as a director or officer of the entity; or as an employee in a position to exert significant influence over the preparation of the client‟s accounting records or the financial statements on which the firm will express an opinion.
KEY AUDIT PARTNER
Independence would be deemed to be compromised unless, subsequent to the partner ceasing to be a key audit partner, the public interest entity had issued audited financial statements covering a period of not less than twelve months and the partner was not a member of the audit team with respect to the audit of those financial statements.
INDEPENDENCE IS DEEMED NOT TO BE
COMPROMISED IF FORMER KEY AUDIT PARTNER
The position was not taken in contemplation of thebusiness combination;
Payments due have been settled in full
The former partner does not continue to participatein the firm‟s activities; and
The position held by the former partner with theaudit client is discussed with those charged withgovernance.
KEY AUDIT PARTNER
Rotation after seven years and coolingfor two years
One year‟s extension possible ifcircumstances outside the firm‟s control
Years as Key Audit Partner when theconcern is non PIE is also counted forrotation
Quantum of fees in selling non-assuranceservices to the partner‟s audit client notto be considered in Evaluation Policies
MANAGEMENT RESPONSIBILITIES
Setting policies and strategic direction;
Directing and taking responsibility for theactions of the entity‟s employees;
Authorizing transactions;
Deciding which recommendations of the firm orother third parties to implement
Taking responsibility for the preparation andfair presentation of the financial statements inaccordance with the applicable financialreporting framework; and
Taking responsibility for designing, implementingand maintaining internal control.
MANAGEMENT RESPONSIBILITIES
If a firm were to assume a managementresponsibility for an audit client, the threatscreated would be so significant that nosafeguards could reduce the threats to anacceptable level
TAXATION SERVICES
The Code contains new provisions relating tothreats that are created by certain tax services.The provisions address tax services under fourbroad headings:
Tax return preparation
Tax calculations for the purposes of preparingthe accounting entries
Tax planning and other advisory services, and
Assistance in the resolution of tax disputes
TAXATION SERVICES
Tax Return Preparation does not generally create a threat to independence if management takes responsibility for the returns including any significant judgments made.
AUDIT CLIENTS THAT ARE NOT PUBLIC INTEREST
ENTITIES
Preparing calculations of current and deferredtax liabilities (or assets) for an audit client forthe purpose of preparing accounting entries thatwill be subsequently audited by the firm createsa self-review threat. The significance of thethreat will depend on:
(a) The complexity of the relevant tax law andregulation and the degree of judgment necessaryin applying them;
(b) The level of tax expertise of the client‟spersonnel; and
(c) The materiality of the amounts to thefinancial statements.
SAFEGAURDS
Using professionals who are not membersof the audit team to perform the service;
If the service is performed by a memberof the audit team, using a partner orsenior staff member with appropriateexpertise who is not a member of theaudit team to review the tax calculations;or
Obtaining advice on the service from anexternal tax professional.
SAFEGAURDS
Having a tax professional, who was notinvolved in providing the tax service, advisethe audit team on the service and review thefinancial statement treatment The servicesare provided for only a short period of timeand are not expected to recur
The situation is discussed with thosecharged with governance.
Obtaining pre-clearance or advice from thetax authorities.
SAFEGAURDS
For PIEs Except in emergency situations, inthe case of an audit client that is a publicinterest entity, a firm shall not prepare taxcalculations of current and deferred taxliabilities (or assets) for the purpose ofpreparing accounting entries that arematerial to the financial statements on whichthe firm will express an opinion.
KNOW YOUR CLIENT (KYC) NORMS
ENTITY INFORMATION
GENERAL INFORMATION
Name of the Entity
Type of Entity
Business Description
KYC
CORPORATE STRUCTURE
Name of ultimate parent company
Name of Parent company
Name of Affiliates
KYC
REGULATORY INFORMATION
Company PAN No
Company Identification No
Directors‘ Identification No
Directors‘ Names & Addresses
Name(s) and Addresses of Companies, in which above person is director
ENGAGEMENT INFORMATION
Type of Engagement
KYC
OTHER INFORMATION
Entities financial Information
Name of the ultimate parent Auditor
Any known violation of any Law/Regulations
―CLEARLY INSIGNIFICANT‖ DROPPED, ‗ACCEPTABLE LEVEL‘ DEFINED
In the revised Code, the application of safeguards isrequired, when necessary, to eliminate threats or toreduce them to „an acceptable level‘ (level which areasonable and informed third party wouldconclude, is acceptable). Previously safeguards hadto be considered if a threat was other than ―clearlyinsignificant” (defined as ‗trivial or inconsequential‘)
A level at which a reasonable and informed thirdparty would be likely to conclude, weighing all thespecific facts and circumstances available to theprofessional accountant at that time, that compliancewith the fundamental principles is not compromised.
ENGAGEMENT TEAM
All partners and staff performing theengagement, and any individuals engaged bythe firm or a network firm who performassurance procedures on the engagement. Thisexcludes external experts engaged by thefirm or by a network firm.
Excludes individuals within the client‘sinternal audit function
CONFLICTS OF INTEREST
A conflict of interest creates a threat toobjectivity and may create threats to theother fundamental principles
A professional accountant shall not allow aconflict of interest to compromise professionalor business judgment.
Identifying, evaluating the interests
implementing safeguards
CONFLICTS OF INTEREST
When addressing conflicts of interest, sharinginformation within the firm or network andseeking guidance of third parties, theprofessional accountant in public practice shallremain alert to the fundamental principle ofconfidentiality.
CONFLICTS OF INTEREST
If the threat created by a conflict of interest is not at an acceptable level, then apply safeguards to eliminate the threat or reduce it to an acceptable level.
If safeguards cannot reduce the threat to an acceptable level, the professional accountant shall decline to perform or shall discontinue professional services that would result in the conflict of interest
CONFLICTS OF INTEREST
Before accepting a new client relationship, engagement, or business relationship, a professional accountant in public practice shall take reasonable steps to identify circumstances that might create a conflict of interest
CONFLICTS OF INTEREST
If nature of the services change see to it that such change not create a conflict of interest.
have an effective conflict identification process
If member of a network, conflict identification shall include any conflicts of interest due to interests and relationships of a network firm.
CONFLICTS OF INTEREST
If necessary to disclose the nature of the conflict of interest, consent should be taken from client.
When disclosure / consent is verbal, the same be documented.
CONFLICTS OF INTEREST
Safeguards may be appropriate:
Segregating certain duties.
Obtaining appropriate oversight
Withdrawing from the decision-making process
Consulting with third parties
Disclose the nature of the conflict to therelevant parties
When disclosure is verbal properdocumentation to be done
THREATS IF CONFLICT OF INTEREST
To prepare or report information in a misleading way
Io become associated with misleading information through the actions of others
Threats and pressures due to corporate culture within the employing organization.
Making disclosures or sharing information
PROPOSALS FOR SECTION 290 / 291
Documentation
Engagement Period
Financial Interests
Loans and Guarantees
Business Relationships
Family and Personal Relationships
Employment with an Audit Client
PROPOSALS FOR SECTION 290 / 291…
Recent Service with an Audit Client
Serving as a Director or Officer of an Audit Client
Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client
Provision of Non-assurance Services to an Audit Client
Management Responsibilities
PROPOSALS FOR SECTION 290 / 291…
Fees
Fees—Relative Size
Fees—Overdue
Contingent Fees
Compensation and Evaluation Policies
Gifts and Hospitality
Actual or Threatened Litigation
Reports that Include a Restriction on Use and Distribution
PROPOSALS FOR SECTION 290
Networks and Network Firms
Public Interest Entities
Related Entities
Those Charged with Governance
Mergers and Acquisitions
Temporary Staff Assignments
Preparing Accounting Records and Financial Statements
Valuation Services
PROPOSALS FOR SECTION 290…
Taxation Services
Internal Audit Services
IT Systems Services
Litigation Support Services
Legal Services
Recruiting Services
Corporate Finance Services
PROPOSALS FOR SECTION 291
Assurance Engagements
Assertion-Based Assurance Engagements
Direct Reporting Assurance Engagements
Multiple Responsible Parties
BREACH OF A PROVISION OF THIS SECTION
290 / 291
Terminate, suspend or eliminate the interest orrelationship that caused the breach
Promptly communicate Firm shall evaluate the significance of that
breach Shall discuss the breach and the action it has
taken or proposes to take with those chargedwith governance
document the breach, the action taken, keydecisions made and all the matters discussedwith those charged with governance and anydiscussions with a member body, relevantregulator or oversight authority
MANDATOR SELF REGULATORYMEASURES
Earlier 2009 COE Chapter 7 it was SELFREGULATORY MEASURES recommended bythe Council
Branch Audits Joint Audit Ratio Between Qualified and Unqualified
StaffDisclosure of Interest by Auditors in other
Firms Ceiling on the Fees Recommended scale of fees chargeable for
the work done by the members of theInstitute is proposed to be deleted
Thank You
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