prof ethics chap_compressed.pdf

CHAPTER 19 7 PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS LEARNING OUTCOMES After reading this chapter student shall be able to:  Understand the Application of the...

CHAPTER 19 7 PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS LEARNING OUTCOMES After reading this chapter student shall be able to:  Understand the Application of the International and Indian Code of Ethics theoretically/practically.  Learn the Application of Fundamental Principles of Professional Ethics by Professional Accountants in practice, service or otherwise occupied.  Identifying threats and Safeguards measures while Compliance of Fundamental Principles of Professional Ethics. © The Institute of Chartered Accountants of India  19.2 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS CHAPTER OVERVIEW This chapter encapsulates the relevant professional ethics guidelines, requirements and the standards of conduct expected from a Chartered Accountant. The Chapter has been divided into various sections to facilitate systematic and easy learning by the students. Chartered Accountants in Practice Membership of the Institute Chartered Accountants in Service and Overview of the Code otherwise occupied of Ethics Professional Professional Ethics The Chartered Accountants Act, 1949: Types of Misconduct: Other Misconduct Council Guidelines Disciplinary Procedure First Schedule Recommended Self- Regulatory Measures Schedules to the Act Second Schedule CA R is one of the leading practitioners in Varanasi and is a partner in audit firm consisting of 8 partners. The firm is allotted branch audit of a leading public sector bank in the same city having advances of `450 crore. Advances portfolio of the branch consist of some reputed export firms. It is noticed during audit that drawing power in stock statements submitted to bankers by these firms is not arrived at properly. There are no apparent errors as such. The issue he is raising can be overlooked, if he chooses to do so. Besides, his staff also digs out certain frivolous procedural irregularities in relation to these accounts. The accounts of all these firms are, otherwise, operating satisfactorily. He intends to report these accounts as NPAs in memorandum of changes and is creating headache for AGM every other day. Completion of audit is being delayed on one pretext or another. Even informal calls by Circle DGM prove to be futile. The amounts involved are huge and much is at stake for branch management. Frustrated and harassed AGM of branch advises owners of these firms to meet CA R in his office and sort out the matter themselves. Out of 7 such firms, 3 owners meet him in his office and assure to avail services of his firm in immediate future. They also try to assuage his ego. He leaves out these accounts from reporting. Owners of the remaining firms do not meet him. Peeved by this, their loan accounts are reported as NPA and adverse comments are made in LFAR. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.3 Is Chartered accountant acting ethically? The answer is resounding NO. He is trying to put his personal benefit and interest above all things. He is overlooking certain matters falling in his discretion selectively for obvious reasons. He is not looking at things objectively. A distinguishing feature of Chartered Accountancy profession is the acceptance of responsibility to act in public interest. Such a behavioural attitude is not expected from professionals. Ethics is something which comes from an individual intrinsically. It has to be ingrained in the temperament of an individual to withstand any selfish motive or temptation. It is a state of mind to act and perform in accordance with moral principles. Spirit of ethics is to be followed and not only what is expressly stated or codified. Consider another case of a practicing Chartered Accountant who comes to know of certain information by virtue of his association with a client. He is also dealing with another client in same line of business. Can he use information acquired from first client to advantage or disadvantage of second client? Again, answer would be in negative. As by doing so, he could breach confidentiality. It can lead to conflict of interest. A professional accountant is not supposed to allow a conflict of interest to compromise professional or business judgment. Professional work of accountants could involve ethical situations on a daily basis consisting of perceived benefits, pressures or dilemmas. There could be a thin line of difference between ethical and unethical. It requires judgment in every situation in accordance with spirit of ethics and its principles. Exhaustive code of ethics is in place for public accountants. It not only contains fundamental principles governing professional ethics along with conceptual framework but also deals with independence requirements for assurance engagements. Besides, there are specific provisions of Chartered Accountants Act, 1949 dealing with professional misconduct. 1. INTRODUCTION The Oxford Dictionary states ethics as “the moral principle that governs a person's behavior or how an activity is conducted”. It is the branch of knowledge that deals with moral principles, whereas “Professional Ethics” consist of personal, organizational and corporate standards of behaviour expected for professionals. Chartered Accountants as professionals are engaged in building trust to vast variety of users, whether shareholders, government, banks, investors, employees or others, which imposes a public interest responsibility on their profession. Like other professionals, Chartered Accountants also have some set of code of ethics. This Code of Ethics establishes ethical requirements for Professional Accountants. © The Institute of Chartered Accountants of India  19.4 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS A Chartered Accountant, either in practice or in service, has to abide by these ethical behaviours. They are expected to follow the fundamental principles of professional ethics while performing their jobs. Service users of professionals should be able to feel secure that there exists a framework of professional ethics which governs the provision of those services. Any deviation from the ethical responsibilities brings the disciplinary mechanism into action against the Chartered Accountants. Fig: Professional Ethics∗ Code of Ethics– Its Necessity: Ethics are as old as human civilization. It is nothing but the laws or rules of acceptable behaviour. The whole foundation of any profession, particularly CA profession, is its credibility. The sole purpose of Code of Ethics is to ensure and uphold this credibility. The main ingredient of our profession is independence. An auditor needs to be independent while carrying out his audit. The provisions discussed in the same ensure that the independence of members of the Institute is not affected. Our Institute’s Motto – ‘Ya Esha Supteshu Jagrati’ is adopted from Kathopanishad and it denotes ‘eternal vigilance’ – awakening when the world is asleep. A distinguishing feature of the accountancy profession is its acceptance of the responsibility to act in the public interest. Code of Ethics seeks to protect the interests of the profession as a whole. It is a shield that enables us to command respect. 2. OVERVIEW OF THE CODE OF ETHICS The revised Code of Ethics contains the following material: Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework, which includes the fundamental principles and the conceptual framework and is applicable to all professional accountants. Part 2 – Professional Accountants in Service, which sets out additional material that applies to professional accountants in service when performing professional activities. Professional accountants in service include professional accountants employed, engaged or contracted in an executive or non-executive capacity in, for example: o Commerce, industry or service. o The public sector. o Education. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.5 o The not-for-profit sector. o Regulatory or professional bodies. Part 2 is also applicable to individuals who are professional accountants in public practice when performing professional activities pursuant to their relationship with the firm as an employee. Part 3 – Professional Accountants in Public Practice, which sets out additional material that applies to professional accountants in public practice when providing professional services. o Independence Standards, which sets out additional material that applies to professional accountants in public practice when providing assurance services, as follows: o Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review engagements. o Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, which applies when performing assurance engagements that are not audit or review engagements. Glossary, which contains defined terms (together with additional explanations where appropriate) and described terms which have a specific meaning in certain parts of the Code. For example, as noted in the Glossary, in Part 4A, the term “audit engagement” applies equally to both audit and review engagements. The Glossary also includes lists of abbreviations that are used in the Code and other standards to which the Code refers. Overview of the Code of Ethics Part 1 Independence Part 2 Part 3 Glossary Standards Complying Professional with the Code, Part 4A Part 4B Professional Accountants Fundamental in Public Principles and Accountants in Service Practice Conceptual Framework Independence for Assurance Independence Engagements for Audit and Other than Audit Review and Review Engagements Engagements © The Institute of Chartered Accountants of India  19.6 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS The Code contains sections which address specific topics. Some sections contain subsections dealing with specific aspects of those topics. Each section of the Code is structured, where appropriate, as follows: Introduction – sets out the subject matter addressed within the section, and introduces the requirements and application material in the context of the conceptual framework. Introductory material contains information, including an explanation of terms used, which is important to the understanding and application of each Part and its sections. Requirements – establish general and specific obligations with respect to the subject matter addressed. Application material – provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance to assist in complying with the requirements. A professional accountant shall comply with the Code. There might be circumstances where laws or regulations preclude an accountant from complying with certain parts of the Code. In such circumstances, those laws and regulations prevail, and the accountant shall comply with all other parts of the Code. 2.1 Fundamental Principles In order to achieve the objectives of the Accountancy profession, professional accountants have to observe a number of prerequisites or fundamental principles. The fundamental principles as discussed in Code of Ethics of ICAI, to be complied, are given below: Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behaviour © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.7 (a) Integrity – Subsection 111 1. A professional accountant shall comply with the principle of integrity, which requires an accountant to be straightforward and honest in all professional and business relationships. Integrity implies fair dealing and truthfulness. 2. A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information: (a) Contains a materially false or misleading statement; (b) Contains statements or information provided negligently; or (c) Omits or obscures required information where such omission or obscurity would be misleading. However, a professional accountant will not be considered to be in breach of matters mentioned above in paragraph 2 if the professional accountant provides a modified report in respect of such above mentioned matter. 3. When a professional accountant becomes aware of having been associated with information described in paragraph 2, the accountant shall take steps to be disassociated from that information. (b) Objectivity- Subsection 112 A professional accountant shall A professional accountant shall not comply with the principle of undertake a professional activity if a objectivity, which requires an circumstance or relationship unduly accountant not to compromise influences the accountant’s professional or business judgment professional judgment regarding that because of bias, conflict of interest or activity. undue influence of others. (c) Professional Competence and Due Care – Subsection 113 1. A professional accountant shall comply with the principle of professional competence and due care, which requires an accountant to: (a) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and (b) act diligently in accordance with applicable technical and professional standards. © The Institute of Chartered Accountants of India  19.8 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS 2. Serving clients and employing organizations with professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities. 3. Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. 4. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. 5. Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. 6. In complying with the principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision. Where appropriate, a professional accountant shall make clients, the employing organization, or other users of the accountant’s professional services or activities, aware of the limitations inherent in the services or activities. (d) Confidentiality- Subsection 114 1. A professional accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and employment relationships. An accountant shall: Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member; Maintain confidentiality of information within the firm or employing organization; Maintain confidentiality of information disclosed by a prospective client or employing organization; Not disclose confidential information acquired as a result of professional and employment relationships outside the firm or employing organization without proper and specific authority, unless there is a legal or professional duty or right to disclose; Not use confidential information acquired as a result of professional and employment relationships for the personal advantage of the accountant or for the advantage of a third party; © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.9 Not use or disclose any confidential information, either acquired or received as a result of a professional or employment relationship, after that relationship has ended; and Take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom advice and assistance are obtained, respect the accountant’s duty of confidentiality. 2. Confidentiality serves the public interest because it facilitates the free flow of information from the professional accountant’s client or employing organization to the accountant in the knowledge that the information will not be disclosed to a third party. Nevertheless, the following are circumstances where professional accountants are or might be required to disclose confidential information or when such disclosure might be appropriate: (a) Disclosure is required by law, Production of documents or other provision of evidence in the course of legal proceedings. Disclosure to the appropriate public authorities of infringements of the law that come to light (b) Disclosure is permitted by law and is authorized by the client or the employing organisation; (c) There is a professional duty or right to disclose, when not prohibited by law: (i) To comply with the requirements of Peer Review or Quality Review of the Institute; (ii) To respond to an inquiry or investigation by a professional or regulatory body; (iii) To protect the professional interests of a professional accountant in legal proceedings; or (iv) To comply with technical and professional standards, including ethics requirements. 3. In deciding whether to disclose confidential information, professional accountants should consider the following points: (a) Whether the interests of any party, including third parties whose interests might be affected, could be harmed if the client or employing organization consents to the disclosure of information by the professional accountant; © The Institute of Chartered Accountants of India  19.10 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS (b) Whether all the relevant information is known and substantiated, to the extent it is practicable; and (c) The proposed type of communication, and to whom it is addressed; (d) Whether the parties to whom the communication is addressed are appropriate recipients. 4. A professional accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between the accountant and a client or employing organization. When changing employment or acquiring a new client, the accountant is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or employment relationship. (e) Professional Behaviour- Subsection 115 1. A professional accountant shall comply with the principle of professional behaviour, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that accountant knows or should know might discredit the profession. Conduct that might discredit the profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession. A professional accountant shall not knowingly engage in any employment, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles. 2. When promoting himself and his work, a professional accountant shall not bring the profession into disrepute. A professional Accountant is required to conduct his affairs in a manner that he remains outside the boundaries of professional and other misconduct. A professional accountant shall be honest and truthful and should not make: (a) Exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or (b) Disparaging references or unsubstantiated comparisons to the work of others. (c) Any direct or indirect measures to advertise any professional/other facts which are in violation of Advertisement Guidelines issued by the Council of the Institute from time to time. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.11 The professional accountant should ensure that the contents of an advertisement are true to the best of his knowledge and belief, and are in conformity with the Advertisement Guidelines, and be aware that the Institute does not own any responsibility, whatsoever, for such contents or claims by him. However, if a professional accountant is in doubt about whether a form of proposed advertising is appropriate, the accountant is encouraged to consult with the Ethical Standards Board of ICAI. A professional accountant shall comply with each of the fundamental principles. The fundamental principles of ethics establish the standard of behaviour expected of a professional accountant. The conceptual framework establishes the approach which an accountant is required to apply to assist in complying with those fundamental principles. A professional accountant might face a situation in which complying with one fundamental principle conflicts with complying with one or more other fundamental principles. In such a situation, the accountant might consider consulting, with: Others Those within the firm Legal charged with The Institute counsel. or employing governance. organization. However, such consultation does not relieve the accountant from the responsibility to exercise professional judgment to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from the matter creating the conflict. The professional accountant is encouraged to document the substance of the issue, the details of any discussions, the decisions made and the rationale for those decisions. 2.2 Threats, Evaluation of Threats and Safeguards The conceptual framework specifies an approach for a professional accountant to: (i) Identify threats to compliance with the fundamental principles; (ii) Evaluate the threats identified; and (iii) Address the threats by eliminating or reducing them to an acceptable level. © The Institute of Chartered Accountants of India  19.12 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS A. Threats Threats to compliance with the fundamental principles fall into one or more of the following categories: the threat that a financial or other interest will inappropriately influence a professional accountant’s judgment or behaviour; Self-interest threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another individual within the accountant’s firm or employing Self-review organization, on which the accountant will rely when forming a judgment as threat – part of performing a current activity; Threats the threat that a professional accountant will promote a client’s or Advocacy employing organization’s position to the point that the accountant’s threat – objectivity is compromised; Familiarity the threat that due to a long or close relationship with a client, or threat – employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; and Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant. A. The following are examples of facts and circumstances within each of those categories of threats that might create threats for a professional accountant when undertaking a professional service: Self-interest Threats: A professional accountant having a direct financial interest in a client. A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price. A professional accountant having a close business relationship with a client. A professional accountant having access to confidential information that might be used for personal gain. A professional accountant discovering a significant error when evaluating the results of a previous professional service performed by a member of the accountant’s firm. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.13 Self-review Threats A professional accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems. A professional accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement. Advocacy Threats A professional accountant promoting the interests of, or shares in, a client. A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third parties. A professional accountant lobbying in favor of legislation on behalf of a client. Familiarity Threats A professional accountant having a close or immediate family member who is a director or officer of the client. A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement, having recently served as the engagement partner. An audit team member having a long association with the audit client. Intimidation Threats A professional accountant being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter. A professional accountant feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question. A professional accountant being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment. A professional accountant having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public.”. © The Institute of Chartered Accountants of India  19.14 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS B. The following are examples of facts and circumstances within each of those categories that might create threats for a professional accountant when undertaking a professional activity: Self-interest Threats A professional accountant holding a financial interest in, or receiving a loan or guarantee from, the employing organization. A professional accountant participating in incentive compensation arrangements offered by the employing organization. A professional accountant having access to corporate assets for personal use. A professional accountant being offered a gift or special treatment from a supplier of the employing organization. Self-review Threats A professional accountant determining the appropriate accounting treatment for a business combination after performing the feasibility study supporting the purchase decision. Advocacy Threats A professional accountant having the opportunity to manipulate information in a prospectus in order to obtain favorable financing. Familiarity Threats A professional accountant being responsible for the financial reporting of the employing organization when an immediate or close family member employed by the organization makes decisions that affect the financial reporting of the organization. A professional accountant having a long association with individuals influencing business decisions. Intimidation Threats A professional accountant or immediate or close family member facing the threat of dismissal or replacement over a disagreement about: o The application of an accounting principle. o The way in which financial information is to be reported. An individual attempting to influence the decision-making process of the professional accountant, for example with regard to the awarding of contracts or the application of an accounting principle. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.15 Specific circumstances give rise to unique threats to compliance with one or more of the fundamental principles. Such unique threats cannot be categorized. In either professional or business relationships, a professional accountant in public practice should always be on the alert for such circumstances and threats. B. Evaluation of Threats: The conditions, policies and procedures described above might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level. (i) Acceptable level: An acceptable level is a level at which a professional accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles. (ii) Reasonable and Informed Third Party: The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner. C. Addressing Threats If the professional accountant determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level. The accountant shall do so by: (i) Eliminating the circumstances, including interests or relationships, that are creating the threats; (ii) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or (iii) Declining or ending the specific professional activity. Actions to Eliminate Threats: Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level. © The Institute of Chartered Accountants of India  19.16 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS D. Safeguards: Safeguards are actions individually or in combination that the accountant takes that effectively reduce threats to an acceptable level. Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might be safeguards to address threats include: Assigning additional time and qualified personnel to required tasks when an engagement has been accepted might address a self-interest threat. Having an appropriate reviewer, who was not a member of the team, review the work performed or advise as necessary might address a self-review threat. Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client might address self-review, advocacy or familiarity threats. Involving another firm to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats. Separating teams when dealing with matters of a confidential nature might address a self-interest threat. 2.3 Non-Compliance with Laws and Regulations (NOCLAR) In the course of providing a professional service to a client or carrying out professional activities for an employer, a Professional accountant may come across an instance of non-compliance with laws and regulations (NOCLAR) or suspected NOCLAR committed or about to be committed by the client or the employer, or by those charged with governance, management or employees of the client or employer. Non-compliance with laws and regulations (“non-compliance”) comprises of acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by:  a client/professional accountant’s employing organisation;  those charged with governance of a client or employing organisation;  management of a client/ employing organisation; or  other individuals working for or under the direction of a client/ employing organisation. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.17 However, NOCLAR under Revised Code of Ethics does not address the personal misconduct unrelated to the business activities of the client/ employing organisation and non-compliance by parties other than listed out in the definition of NOCLAR. As per IESBA, following examples would be covered in NOCLAR:- Money laundering, Banking and other Fraud, corruption and Securities markets terrorist financing and financial products and bribery and trading proceeds of crime services Tax and pension Environmental Public health and Data protection liabilities and protection safety payments The objective of NOCLAR is that - turning a blind eye to potential NOCLAR is not an appropriate response from professional accountants, while placing renewed emphasis on the roles of management and those charged with governance in addressing the matter. Further, it increases awareness and understanding among Professional accountant of their legal and regulatory responsibilities when they face NOCLAR. Some important facts about NOCLAR are given below: During Course of Providing a Service: NOCLAR will be applicable if a professional accountant encounters, or is made aware of, non-compliance or suspected non-compliance in the course of providing a professional service to a client. He is not required to investigate, nor responsible for ensuring compete compliance. Expertise of Laws not Required: A professional accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, he is not expected to have a level of knowledge of laws and regulations greater than that which is required to undertake the engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body. Certain Matters Expressly out of Purview: Matters that are clearly inconsequential, or relating to personal misconduct pertaining to business activities of the client not covered. Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. © The Institute of Chartered Accountants of India  19.18 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS 2.3.1 Applicability of NOCLAR in India: 1. Responding to Non-Compliance with Laws and Regulations (NOCLAR) applicable to Professional Accountants in service (Section 260): Applicable to Senior Professional Accountants in service, being employees of listed entities. Senior professional accountants in service (“senior professional accountants”) are directors, officers or senior employees able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organization’s human, financial, technological, physical and intangible resources. It is further explained that the senior professional accountants refer to key managerial personnel. 2. Responding to Non-Compliance with Laws and Regulations (NOCLAR) applicable to Professional Accountants in public practice (Section 360) : Applicable to Audit engagements of entities the shares of which are listed on recognized stock exchange(s) in India and have net worth of 250 crores of rupees or more. “For the purpose of Section-360 “Audit” or “Audit engagement” shall mean a reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements give a true and fair view in accordance with an applicable financial reporting framework”. 2.3.2 NOCLAR vs. SA 250 1. SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is applicable on professional accountants in service, and in practice. 2. SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of material amounts and disclosures in the financial statements (such as tax and labour laws); and other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business. NOCLAR, while being alike to SA 250 till this point, is further ahead of it in that it takes into account non-compliance that causes substantial harm resulting in serious consequences in financial or non-financial terms. 3. SA 250 does not define stakeholders. NOCLAR is related to affect of non-compliance on investors, creditors, employees as also the general public. 4. As per NOCLAR, in exceptional circumstances, the professional accountant might become aware of an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.19 the company, the accountant shall exercise professional judgment and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is permitted. This provision is not existent in SA 250. 2.3.2 Applicability of NOCLAR in India: Responding to NOCLAR In case of In case of Steps to be taken Employment Audit Engagement for responding Obtaining an Responsibility of understanding of the Senior Professional matter Accountant in Responsibilities of Service Professional Accountant Addressing the matter Responsibilities of Professional Accountant other than Senior Professional Accountant Seeking Advice Determining whether further action is needed Determining whether to disclose the matter to an Appropriate Authority Imminent Breach Documentation © The Institute of Chartered Accountants of India  19.20 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS It may also be noted that in a situation where disclosure ought to be made by the Auditor, the “Appropriate authority” for the purpose of disclosure will depend on the nature of the matter. For example, the appropriate authority would be SEBI in the case of fraudulent financial reporting. Appropriate alignment has been made in the Code with regard to requirements of Confidentiality, as required under Chartered Accountants Act, 1949. 2.3.3 Provisions of Confidentiality under Chartered Accountants Act, 1949 For Members in practice – Clause (1) of Part -I of Second schedule to The Chartered Accountants Act, 1949 : A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force; For Members in service - Clause (2) of Part-II to the Second Schedule of the Chartered Accountants Act, 1949 : A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment except as and when required by any law for the time being in force or except as permitted by the employer; Documentation Requirements in NOCLAR : Revised Code over and above require the professional accountant to follow the additional documents requirements as under: How management / those charged with governance have responded to the matter. The course of action the accountant considered, the judgments made and the decisions that were taken, having regard to the reasonable and informed third party test. How the accountant is satisfied that the responsibility of public interest has been fulfilled. This documentation is in addition to complying with the documentation requirements under applicable auditing standards. SAs, for example, require a professional accountant performing an audit of financial statements to: Prepare documentation sufficient to enable an understanding of significant matters arising during the audit, the conclusions reached, and significant professional judgments made in reaching those conclusions; © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.21 Document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place; and Document identified or suspected non-compliance, and the results of discussion with management and, where applicable, those charged with governance and other parties outside the entity. 3. MEMBERSHIP OF THE INSTITUTE On acceptance of application by the Council, the applicant's name shall be entered in the Register and a certificate of membership in the appropriate Form shall be issued to the applicant. Particulars of the Register: Section 19 of the Chartered Accountants Act, 1949 provides the particulars to be included in the Register about every member of the Institute, namely- Full name, date of birth, domicile, residential and professional address; Date of entry of name in the Register; Qualifications; Whether the member holds a COP; and Any other prescribed particulars. 3.1 Disabilities for the Purpose of Membership Section 8 of the Chartered Accountants Act, 1949 enumerates the circumstances under which a person is debarred from having his name entered in or borne on the Register of Members, as follows: (i) If he has not attained the age of 21 years at the time of his application for the entry of his name in the Register of members; or (ii) If he is of unsound mind and stands so adjudged by a competent court; or (iii) If he is an undischarged insolvent; or (iv) If he, being a discharged insolvent, or has not obtained from the court a certificate stating that his insolvency was caused by misfortune without any misconduct on his part; or (v) If he has been convicted by a competent Court whether within or without India, of an offence involving moral turpitude and punishable with imprisonment or of an offence, not of a technical nature, committed by him in his professional capacity unless in respect of the offence committed he has either been granted a pardon or, on an application made by him in this behalf, the Central Government has, by an order in writing, removed the disability; or © The Institute of Chartered Accountants of India  19.22 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS (vi) If he has been removed from membership of the Institute on being found on inquiry to have been guilty of professional or other misconduct; It may be noted that a person who has been removed from membership for a specified period, shall not be entitled to have his name entered in the Register until the expiry of such period. In addition, failure on the part of a person to disclose the fact that he suffers from any one of the disabilities aforementioned would constitute professional misconduct. The name of the person, who is found to have been subject at any time to any of the disabilities aforementioned, can be removed from the Register of Members by the Council. 3.2 Types of Members of the Institute Section 5 of the Chartered Accountants Act, 1949 provides the division of members of the Institute. The members shall be divided into two classes designated as Associates and Fellows. Associate Member: Any person, whose name has been entered in the Register of members, Classes of Members of the Institute shall be deemed to have become an Associate of the Institute and shall also be entitled to use the letters A.C.A. after his name to indicate that he is an Associate Member of the Institute. Associates Fellows Fellow Member: The name of following types of members shall be entered into the Register of members as a Fellow of the Institute, on payment of such fees along with the application made and granted in the prescribed manner- (i) An associate member who has been in continuous practice in India for at least 5 years, (ii) A member who has been an associate for a continuous period of not less than 5 years and who possesses such qualifications as may be prescribed by the Council with a view to ensuring that he has experience equivalent to the experience normally acquired as a result of continuous practice for a period of 5 years as a Chartered Accountant. The abovementioned members shall be entitled to use the letters F.C.A. after his name to indicate that he is a Fellow Member of the Institute. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.23 3.3 Removal of Name from the Register As per section 20 of the Act, the Council may remove, from the Register, the name of any member of the Institute in the following cases- (i) who is dead; or (ii) from whom a request has been received to that effect; or (iii) who has not paid any prescribed fee required to be paid by him; or (iv) who is found to have been subject at the time when his name was entered in the Register of members, or who at any time thereafter has become subject, to any of the disabilities mentioned in Section 8, or who for any other reason has ceased to be entitled to have his name borne on the Register. The Council shall remove the name of any member from the Register in respect of whom an order has been passed under this Act removing him from membership of the Institute. If the name of any member has been removed from the Register for non-payment of prescribed fee as required to be paid by him, then, on receipt of an application, his name may be entered again in the Register of members on payment of the arrears of annual fee and entrance fee along with such additional fee, as may be determined by the Council. 3.4 Restoration of Membership In addition to the provisions of the section 20 of the Chartered Accountants Act, 1949 (as discussed in above Para), Regulation 19 of the Chartered Accountants Regulations, 1988, states that the name of the member may be restored by the Council in the Register on an application, in the appropriate Form, received in this behalf whose name has been removed from the Register for non-payment of prescribed fee as required to be paid by him, if he is otherwise eligible to such membership, on his paying the arrears of annual membership fee, entrance fee and additional fee determined by the Council under the Act. However, the effective date in case of restoration of cancelled membership, in different situations, shall be in the following manner: © The Institute of Chartered Accountants of India  19.24 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Application for restoration and requisite Restoration shall be with effect from the fees are made within the same year of date on which it was removed from the removal Register. Removal of name under the orders of the Board of Discipline or the Disciplinary Restoration shall be in accordance with Committee or the Appellate Authority or the such orders. High Court Restoration shall be with effect from the In other cases date on which the application and fee are received. 3.5 Penalty for Falsely Claiming to be a Member etc. Section 24 of the Chartered Accountants Act, 1949 provides that any person who- (i) not being a member of the Institute; (a) represents that he is a member of the Institute; or (b) uses the designation Chartered Accountant; (ii) being a member of the Institute, but not having a certificate of practice, represents that he is in practice or practices as a Chartered Accountant, shall be punishable on first conviction with fine which may extend to ` 1000, and on any subsequent conviction with imprisonment which may extend to 6 months or with fine which may extend to ` 5,000, or with both. The provision may be understood with a case, where, the Court of Additional Chief Judicial Magistrate had by its judgement found the accused guilty under Section 24(i)(a) & (b) of the Chartered Accountants Act, 1949 and Section 465 of the Indian Penal Code. The Court imposed a fine on the accused and in the event of his failure to pay the fine, sentenced to rigorous imprisonment for three months. (Case of Prem Batra decided on 18.7.1989) 4. CHARTERED ACCOUNTANTS IN PRACTICE A practicing Chartered Accountant is a person who is a member of the Institute and is holding Certificate of Practice; and includes such members of the Institute who are deemed to be in Practice in accordance with the provisions of the Chartered Accountants Act, 1949. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.25 4.1 Significance of the Certificate of Practice Section 6 of the Chartered Accountants Act, 1949 provides that: - (1) No member of the Institute shall be entitled to practise whether in India or elsewhere unless he has obtained from the Council a certificate of practice: It may be noted that this provision is not applicable to any person who, immediately before the commencement of this Act, has been in practice as a registered accountant or a holder of a restricted certificate until one month has elapsed from the date of the first meeting of the Council. (2) Every such member shall pay such annual fee for his certificate as may be determined, by notification, by the Council [..], and such fee shall be payable on or before the 1st day of April each year (3) The certificate of practice obtained under sub-section (1) may be cancelled by the Council under such circumstances as may be prescribed. A member who is not in practice is precluded from accepting engagement to render services of any of the types normally prescribed for a Chartered Accountant, even though for doing so, he does not require special qualifications. The Council of the institute is of view that- (i) Once the person concerned becomes a member of the Institute, he is bound by the provisions of the Chartered Accountants Act and its Regulations. If and when he appears before the Income-tax Tribunal as an Income-tax representative after having become a member of the Institute, he could so appear only in his capacity as a Chartered Accountant and a member of the Institute. Having, as it were, brought himself within the jurisdiction of the Chartered Accountants Act and its Regulations, he could not set them at naught by contending that even though he continues to be a member of the Institute and has been punished by suspension from practice as a member, he would be entitled, in substance, to practice in some other capacity. (ii) A member of the Institute can have no other capacity in which he can take up such practice, separable from his capacity to practice as a member of the Institute.” Therefore, in nutshell, a Chartered Accountant whose name has been removed from the membership for professional and/or other misconduct, during such period of removal, will not appear before the various tax authorities or other bodies before whom he could have appeared in his capacity as a member of this Institute. © The Institute of Chartered Accountants of India  19.26 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Illustration 1 A Chartered Accountant in practice has been suspended from practice for a period of 6 months and he had surrendered his Certificate of Practice for the said period. During the said period of suspension, though the member did not undertake any audit assignments, he undertook representation assignments for income tax whereby he would appear before the tax authorities in his capacity as a Chartered Accountant. Solution Undertaking Tax Representation Work: A chartered accountant not holding certificate of practice cannot take up any other work because it would be violation of the relevant provisions of the Chartered Accountants Act, 1949. In case a member is suspended and is not holding Certificate of Practice, he cannot in any other capacity take up any practice separable from his capacity to practice as a member of the Institute. This is because once a person becomes a member of the Institute; he is bound by the provisions of the Chartered Accountants Act, 1949 and its Regulations. If he appears before the income tax authorities, he is only doing so in his capacity as a chartered accountant and a member of the Institute. Having bound himself by the said Act and its Regulations made there under, he cannot then set the Regulations at naught by contending that even though he continues to be a member and has been punished by suspension, he would be entitled to practice in some other capacity. Conclusion: Thus, in the instant case, a chartered accountant would not be allowed to represent before the income tax authorities for the period he remains suspended. Accordingly, in the present case he is guilty of professional misconduct. 4.2 Cancellation and Restoration of Certificate of Practice Regulation 10 provides that a Certificate of Practice (COP) shall be liable for cancellation, if: (i) the name of the holder of the certificate is removed from the Register; or (ii) the Council is satisfied, after giving an opportunity of being heard to the person concerned, that such certificate was issued on the basis of incorrect, misleading or false information, or by mistake or inadvertence; or (iii) a member has ceased to practise; or (iv) a member has not paid annual fee for certificate of practice till 30 th day of September of the relevant year. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.27 Where a COP is cancelled, the holder shall surrender the same to the Secretary. Further, Regulation 11 on restoration of COP states that, on an application made in the approved Form and on payment of such fee, the Council may restore the COP with effect from the date on which it was cancelled, to a member whose certificate has been cancelled due to non-payment of the annual fee for the COP and whose application, complete in all respects, together with the fee, is received by the Secretary before the expiry of the relevant year. 4.3 Members - deemed to be in Practice Every member of the Institute is entitled to designate himself as a Chartered Accountant. There are two classes of members, those who are in practice and those who are otherwise occupied. In Section 2(2) of the Act, the term deemed “to be in practice” has been defined as follows: “A member of the Institute shall be deemed “to be in practice” when individually or in partnership with Chartered Accountants in practice, or in partnership with members of such other recognised professions as may be prescribed, he, in consideration of remuneration received or to be received. (i) engages himself in the practice of accountancy; or (ii) offers to perform or performs service involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements or holds himself out to the public as an accountant; or (iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or (iv) renders such other services as, in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice; and the words “to be in practice” with their grammatical variations and cognate expressions shall be construed accordingly. Explanation – An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants or firm consisting of one or more chartered accountants and members of any other professional body having prescribed qualifications shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of Articled Assistants”. Pursuant to Section 2(2)(iv) above, the Council has passed a resolution permitting a Chartered Accountant in practice to render entire range of “Management Consultancy and other Services”. © The Institute of Chartered Accountants of India  19.28 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS The expression “Management Consultancy and other Services” shall not include the function of statutory or periodical audit, tax (both direct taxes and indirect taxes) representation or advice concerning tax matters or acting as liquidator, trustee, executor, administrator, arbitrator or receiver, but shall include the following- (i) Financial management planning and financial policy determination.* (ii) Capital structure planning and advice regarding raising finance.* (iii) Working capital management.* (iv) Preparing project reports and feasibility studies.* (v) Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds etc. (vi) Budgeting including capital budgets and revenue budgets. (vii) Inventory management, material handling and storage. (viii) Market research and demand studies. (ix) Price-fixation and other management decision making. (x) Management accounting systems, cost control and value analysis. (xi) Control methods and management information and reporting. (xii) Personnel recruitment and selection. (xiii) Setting up executive incentive plans, wage incentive plans etc. (xiv) Management and operational audits. (xv) Valuation of shares and business and advice regarding amalgamation, merger and acquisition. Acting as Registered Valuer under the Companies Act, 2013 read with The Companies (Registered Valuers and Valuation) Rules, 2017. (incorporated pursuant to decision of Council at its 388th Meeting) (xvi) Business Policy, corporate planning, organisation development, growth and diversification. (xvii) Organisation structure and behaviour, development of human resources including design and conduct of training programmes, work study, job-description, job evaluation and evaluation of workloads. (xviii) Systems analysis and design, and computer related services including selection of hardware and development of software in all areas of services which can otherwise be * Consideration of “tax implications” while rendering the services at (i), (ii), (iii) and (iv) above will be considered as part of “Management Consultancy and other services”. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.29 rendered by a Chartered Accountant in practice and also to carry out any other professional services relating to EDP. (xix) Acting as advisor or consultant to an issue, including such matters as: (a) Drafting of prospectus and memorandum containing salient futures of prospectus. Drafting and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of Companies and SEBI. (b) Preparation of publicity budget, advice regarding arrangements for selection of (i) ad- media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the underwriting arrangement, distribution of publicity and issue material including application form, prospectus and brochure and deciding on the quantum of issue material (In doing so, the relevant provisions of the Code of Ethics must be kept in mind). (c) Advice regarding selection of various agencies connected with issue, namely Registrars to Issue, printers and advertising agencies. (d) Advice on the post issue activities, e.g., follow up steps which include listing of instruments and dispatch of certificates and refunds, with the various agencies connected with the work. Explanation - For removal of doubts, it is hereby clarified that the activities of broking, underwriting and portfolio management are not permitted. (xx) Investment counselling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of Ethics must be kept in mind). (xxi) Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the relevant provisions of the Code of Ethics must be kept in mind). (xxii) Quality Audit. (xxiii) Environment Audit. (xxiv) Energy Audit. (xxv) Acting as Recovery Consultant in the Banking Sector. (xxvi) Insurance Financial Advisory Services under the Insurance Regulatory & Development Authority Act, 1999, including Insurance Brokerage. (xxvii) Acting as Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016 (incorporated pursuant to decision of Council at its 362 nd Meeting). (xxviii) Administrative Services. (incorporated pursuant to decision of Council at its 388th Meeting) Administrative services involve assisting clients with their routine or mechanical tasks within the normal course of operations. Such services require little to no professional judgment and are clerical in nature. © The Institute of Chartered Accountants of India  19.30 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Examples of administrative services include: Word processing services. Preparing administrative or statutory forms for client approval. Submitting such forms as instructed by the client. Monitoring statutory filing dates, and advising an audit client of those dates. For example, the functions of a GST practitioner as specified under Rule 83(8) of Central Goods and Services Tax Rules, 2017:- (a) furnish the details of outward and inward supplies; (b) furnish monthly, quarterly, annual or final return; (c) make deposit for credit into the electronic cash ledger; (d) file a claim for refund; (e) file an application for amendment or cancellation of registration; (f) furnish information for generation of e-way bill; (g) furnish details of challan in form GST ITC-04; (h) file an application for amendment or cancellation of enrolment under rule 58; and (i) file an intimation to pay tax under the composition scheme or withdraw from the said scheme. Pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949, read with Regulation 191 of Chartered Accountants Regulations, 1988 a member shall be deemed to be in practice if he, in his professional capacity and neither in his personal capacity nor in his capacity as an employee, acts as a liquidator, trustee, executor, administrator, arbitrator, receiver, adviser or representative for costing, financial or taxation matters or takes up an appointment made by the Central Government or a State Government or a court of law or any other legal authority or acts as a Secretary unless his employment is on a salary-cum-full-time basis. It is necessary to note that a person is deemed to be in practice not only when he is actually engaged in the practice of accountancy but also when he offers to render accounting services whether or not he in fact does so. In other words, the act of setting up of an establishment offering to perform accounting services would tantamount to being in practice even though no client has been served. It may also be noted that a member of the Institute is deemed to be in practice during the period he renders ‘service with armed forces’. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.31 The above provisions need to be correlated with the provisions of section 144 of the Companies Act, 2013 which prohibits an auditor of the company from rendering certain services directly or indirectly to the company or its holding company or its subsidiary company. Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company), namely (i) accounting and book- keeping services; (ii) internal audit; (iii) design and implementation of any financial information system; (iv) actuarial services; (v) investment advisory services; (vi) investment banking services; (vii) rendering of outsourced financial services;(viii) management services; and (ix) any other kind of services as may be prescribed. Design and Accounting and book implementation of any Internal audit; keeping services; financial information system; Investment advisory Investment banking Actuarial services; services; services; Rendering of Any other kind of Management services; outsourced financial services as may be and services; prescribed. Certain services not to be rendered by the Auditor as per section 144 of the Companies Act 2013. Illustration 2 Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct training programmes for and on behalf of a client where he is not providing any assurance service. Is this a professional misconduct? © The Institute of Chartered Accountants of India  19.32 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Solution Providing Management Consultancy and Other Services: Under Section 2(2)(iv) of the Chartered Accountants Act, 1949, a member of the Institute shall be deemed “to be in practice” when individually or in partnership with Chartered Accountants in practice, he, in consideration of remuneration received or to be received renders such other services as, in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice. Pursuant to Section 2(2)(iv) above, the Council has passed a resolution permitting a Chartered Accountant in practice to render entire range of “Management Consultancy and other Services”. The definition of the expression “Management Consultancy and other Services” includes Personnel recruitment and selection. Personnel Recruitment and selection includes, development of human resources including designing and conduct of training programmes, work study, job description, job evaluation and evaluations of workloads. Conclusion: Therefore, Mr. A is not guilty of professional misconduct. 4.4 Companies not to Engage in Accountancy Section 25 of the Chartered Accountants Act, 1949 provides that: (1) No company, whether incorporated in India or elsewhere, shall practise as chartered accountants. Here, the term “company” shall include any limited liability partnership which has company as its partner for the purpose of this section. (2) If any company contravenes this provision then, without prejudice to any other proceedings which may be taken against the company, every director, manager, secretary and any other officer thereof who is knowingly a party to such contravention shall be punishable with fine which may extend on first conviction to ` 1,000 and on any subsequent conviction to ` 5,000. In addition, as per section 141(2) of the Companies Act, 2013, where a firm (including a limited liability partnership) is appointed as an auditor of a company, then, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm. Thought the LLPs are allowed to be appointed as an auditor in accordance with the Companies Act, 2013, however, it cannot be engaged into practice, if it has company as its partner, as per the Chartered Accountants Act, 1949. Therefore, it can be inferred that the LLP not having any company as its partner, can be engaged into practicing and thus take audit assignments. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.33 4.5 Member in Practice Prohibited from using a Designation other than Chartered Accountant (i) Members of the Institute are now permitted to use the word 'CA' as prefix before their name irrespective of the fact that they are in practice or not. (ii) Under Section 7 of the Chartered Accountants Act, 1949 a member in practice cannot use any designation other than that of a Chartered Accountant, nor he can use any other description, whether in addition thereto or in substitution therefor, but a member who is not in practice and does not use the designation of a Chartered Accountant may use any other description. Nevertheless a member in practice may use any other letters or description indicating shall be deemed to prohibit any such person from adding any other description or letters to his name, if entitled thereto, to membership of such other Institute of accountancy, whether in India or elsewhere, as may be recognised in this behalf by the Council, or any other qualification that he may possess, or to prohibit a firm, all the partners of which are members of the Institute and in practice, from being known by its firm name as Chartered Accountants. Merchant Banker / Advisor to an issue: The members may apply for and obtain registration as category IV Merchant Banker under the SEBI’s rules and regulations and act as Advisor or Consultant to an issue. In client Companies’ offer documents and advertisements regarding capital issue, name and address of the Chartered Accountant or firm of Chartered Accountants acting as Advisor or Consultant to the Issue could be indicated under the caption “Advisor/Consultant to the Issue”. However, the name and address of such Chartered Accountant/firm of Chartered Accountants should not appear prominently. Directors of Companies, Members of political parties, position in clubs, etc.: The members of the Institute who are also Directors in Companies, members of Political parties or Chartered Accountants Cells in the political parties, holding different positions in clubs or other organisations are not permitted to mention these positions as these would be violative of the provisions of Section 7 of the Act. Members who are also Cost Accountants: Though a member cannot designate himself as a Cost Accountant, he can use the letters A.C.M.A (Associate) or F.C.M.A (Fellow) after his name, when he is a member of that Institute. Permission to mention qualifications of certain Institutions: The members are permitted to mention membership of a foreign Institute of Accountancy, which has been recognized by the Council through a Memorandum of Understanding (MoU) / Mutual Recognition Agreement (MRA) with the said Institute. © The Institute of Chartered Accountants of India  19.34 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Other Qualifications of the member With regard to the other qualifications of a member, which he is permitted to mention, the following observations of the Supreme Court in Institute of Chartered Financial Analyst of India (ICFAI) vs Council of the Institute of Chartered Accountants of India (ICAI) dated 16th May, 2007 are relevant: “The expression 'any other qualification that he may possess', therefore, must be read as qualification other than conferred upon the member by other Institutes of Accountancy. Such qualification of accountancy may be conferred even by other Institutes. But as noticed hereinbefore, an exemption had been granted by reason of a resolution of the Institute in relation to the Institute of Cost and Works Accountants. Furthermore, a degree conferred by any university also is subject to an exemption from the rigour of the provisions of Section 7 of the Act. There cannot, therefore, be any doubt whatsoever that 'the other qualification' would mean a qualification other than granted by an Institute of Accountancy, subject of course to recognition thereof by the Institute.” 3. For example, though a member cannot designate himself as a Cost Accountant, he can use the letters A.C.M.A.(Associate) or F.C.M.A. (fellow) after his name, when he is a member of that Institute. It is improper for a Chartered Accountant to state on his professional documents that he is an Income-tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant. Member are allowed to appear before the various authorities including Company Law Board, Income Tax Appellate Tribunal, Sales Tax Tribunal where the law has permitted the same, so far as the designation “Corporate Lawyer” is concerned, the Council was of the view that as per the existing provisions of law, a Chartered Accountant in practice is not entitled to use the designation “Corporate Lawyer”. Further, the members are not permitted to use the initials ‘CPA’ (standing for Certified Public Accountant) on their visiting cards. Members of the Institute in practice who are otherwise eligible may also practice as Company Secretaries and/or Cost Accountants. Such members shall, however, not use designation/s of the aforesaid Institute/s simultaneously with the designation “Chartered Accountant”. 4.6 Maintenance of Branch Offices In terms of Section 27 of the Act, if a Chartered Accountant in practice or a Firm of Chartered Accountants has more than one office in India, each one of such offices should be in the separate charge of a member of the Institute. Failure on the part of a member or a firm to have a member in © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.35 charge of its branch and a separate member in case of each of the branches, where there is more than one, would constitute professional misconduct. However, exemption has been given to members practicing in hill areas subject to certain conditions. The conditions are: (1) Such members/firm be allowed to open temporary offices in a city in the plains for a limited period not exceeding 3 months in a year. (2) The regular office need not be closed during this period and all correspondence can continue to be made at the regular office. (3) The name board of the firm in the temporary office should not be displayed at times other than the period such office is permitted to function as above. (4) The temporary office should not be mentioned in the letterheads, visiting cards or any other documents as a place of business of the member/firm. (5) Before commencement of every winter it shall be obligatory on the member/firm to inform the Institute that he/it is opening the temporary office from a particular date and after the office is closed at the expiry of the period of permission, an intimation to that effect should also be sent to the office of the Institute by registered post. Above conditions apply to any additional office situated at a place beyond 50 kms from the municipal limits in which any office is situated. It is necessary to mention that the Chartered Accountant in-charge of the branch of another firm should be associated with him or with the firm either as a partner or as a paid assistant. If he is a paid assistant, he must be in whole time employment with him. The requirement of Section 27 in regard to a member being in charge of an office of a Chartered Accountant in practice or a firm of such Chartered Accountants shall be satisfied only if the member is actively associated with such office. Such association shall be deemed to exist if the member resides in the place where the office is situated for a period of not less than 182 days in a year or if he attends the said office for a period of not less than 182 days in a year or in such other circumstances as, in the opinion of the Executive Committee, establish such active association. However, a member can be in-charge of two offices if they are located in one and the same Accommodation. In this context some of the Council’s decisions are as follows: (1) With regard to the use of the name-board, there will be no bar to the putting up of a name- board in the place of residence of a member with the designation of Chartered Accountant, provided it is a name-plate or a name-board of an individual member and not of the firm. © The Institute of Chartered Accountants of India  19.36 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Illustration 3 Mr. X & Mr. Y, partners of a Chartered Accountant Firm, one in-charge of Head Office and another in-charge of Branch at a distance of 80 km. from the municipal limits, puts up a name-board of the firm in both premises and also in their respective residences. Putting Name Board of the Firm at Residence: The council of the Institute has decided that with regard to the use of the name-board, there will be no bar to the putting up of a name-board in the place of residence of a member with the designation of chartered accountant, provided, it is a name-plate or board of an individual member and not of the firm. In the given case, partners of XY & Co., put up a name board of the firm in both offices but not in their respective residences. Conclusion: Thus, the chartered accountants are guilty of misconduct. Distance given in the question is not relevant for deciding. (2) The exemption may be granted to a member or a firm of Chartered Accountants in practice to have a second office without such second office being under the separate charge of a member of the Institute, provided- (a) the second office is located in the same premises, in which the first office is located or, (b) the second office is located in the same city, in which the first office is located or, City X 1st Office 2nd Office (c) the second office is located within a distance of 50 km. from the municipal limits of a city, in which the first office is located. City X Municipal Limit City Y 1stOffice 2nd Office (Head Office) (Branch Office) 15 km 35 km 10 km Effective distance from 1st Office = 35 km + 10 km = 45 km © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.37 A member having two offices of the type referred to above shall have to declare, which of the two offices is his main office, which would constitute his professional address. Illustration 4 Mr. K, Chartered Accountant practicing as a sole proprietor has an office in the suburbs of Chennai. Due to increase in the income tax assessment work, he opens another office near the income tax office, which is within the city and at a distance of 30 km. from his office in the suburb. For running the new office, he has employed a retired Income Tax Commissioner who is not a Chartered Accountant. Solution Maintenance of Branch Office in the Same City: As per section 27 of the Chartered Accountants Act, 1949 if a chartered accountant in practice has more than one office in India, each one of these offices should be in the separate charge of a member of the Institute. However, a member can be in charge of two offices if the second office is located in the same premises or in the same city, in which the first office is located; or the second office is located within a distance of 50 km. from the municipal limits of a city, in which the first office is located. In the given case, Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in suburbs of Chennai, and due to increase in the work he opened another branch within the city near the income tax office. He also employed a retired income tax commissioner to run the new office and the second office is situated within a distance of 30 kilometers from his office in the suburb. Conclusion: In view of above provisions, there will be no misconduct if Mr. K will be in- charge of both the offices. However, he is bound to declare which of the two offices is the main office. 4.7 KYC Norms for CA in Practice The financial services industry globally is required to obtain information of their clients and comply with Know Your Client Norms (KYC norms). Keeping in mind the highest standards of Chartered Accountancy profession in India, the Council of ICAI issued such norms to be observed by the members of the profession who are in practice. © The Institute of Chartered Accountants of India  19.38 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS In light of this background, the Council of ICAI approved the following KYC Norms which are mandatory in nature and shall apply in all assignments pertaining to attestation functions. The KYC Norms approved by the Council of ICAI are given below: 1. Where Client is an Individual/ Proprietor A. General Information Name of the Individual PAN No. or Aadhar Card No. of the Individual Business Description Copy of last Audited Financial Statement B. Engagement Information Type of Engagement 2. Where Client is a Corporate Entity A. General Information Name and Address of the Entity Business Description Name of the Parent Company in case of Subsidiary Copy of last Audited Financial Statement B. Engagement Information Type of Engagement C. Regulatory Information Company PAN No. Company Identification No. Directors’ Names & Addresses Directors’ Identification No. © The Institute of Chartered Accountants of India  PROFESSIONAL ETHICS & LIABILITIES OF AUDITORS 19.39 3. Where Client is a Non-Corporate Entity A. General Information Name and Address of the Entity Copy of PAN No. Business Description Partner’s Names & Addresses (with their PAN/Aadhar Card/DIN No.) Copy of last Audited Financial Statement B. Engagement Information Type of Engagement 5. CHARTERED ACCOUNTANTS IN SERVICE In accordance with the definitions provided under the Code of Ethics, a Professional Accountant in Service or Chartered Accountant in Service means a professional accountant employed or engaged in an executive or non-executive capacity in areas such as commerce, industry, service, the public sector, education, the not-for-profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by such entities. 6 DISCIPLINARY PROCEDURE Sections 21, 21A, 21B, 21C, 22-A and 22-G of the Chartered Accountants Act read with The Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct of Cases) Rules, 2007 have laid down the following procedure in regard to the investigation of misconduct of members which has been summarized as under:- © The Institute of Chartered Accountants of India  19.40 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS Flow Chart of Discipline Procedure Mechanism Receipt of (i) Complaint along with prescribed fee, or (ii) Information, against member of ICAI of alleged misconduct Disciplinary Directorate Prima Facie Opinion Guilty Not Guilty Submit all information & Falling in Falling in complaints to First Schedule Second Schedule or Both Board of Discipline Place the matter Place the matter before Board of Discipline before Accepted Rejected Disciplinary Committee Accepted Rejected Accepted Rejected