Code of Ethics for Chartered Accountants

The Second Schedule of the Chartered Accountants Act, 1949, deals with more serious forms of professional misconduct, often involving gross negligence, fraud, or a significant breach of trust. It is also divided into four parts:

• Part I (Members in Practice): Covers acts like disclosing confidential information, certifying false statements, gross negligence, failure to obtain sufficient information, failure to keep money of clients in a separate bank account, or charging contingent fees.
• Part II (Members in Service): Covers acts like disclosing confidential information or certifying false statements.
• Part III (Members generally): Covers acts like being found guilty of any civil or criminal offense by a competent court.
• Part IV (Other Misconduct): Similar to the First Schedule, covers acts that bring disrepute to the profession.
  Offenses under the Second Schedule are dealt with by the Disciplinary Committee, and the penalties are more severe, ranging from removal of the name from the Register for more than three months to permanently. These misconducts significantly impair public confidence and the integrity of the profession, hence the stricter penalties.

The ICAI Code of Ethics addresses the complexities arising from network firms and multi-disciplinary practices (MDPs) to ensure that the fundamental principles, especially independence, are not compromised.

• Network Firms: A network firm is defined as a firm or entity that belongs to a larger structure (a "network") that is aimed at cooperation and shares common ownership, control, or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. Ethical requirements, particularly independence rules, apply to all entities within the network as if they were a single firm. This means if one network firm cannot be independent of an audit client, no other firm in the network can be.
• Multi-disciplinary Firms (MDPs): While the CA Act, 1949, restricts CAs from forming partnerships with non-CAs for professional services, the ICAI has permitted CAs to form multi-disciplinary partnerships with professionals from other specified fields (e.g., Company Secretaries, Cost Accountants, Advocates, Engineers) under specific regulations. The ethical guidelines emphasize:
  • Maintaining the distinct identity and independence of the CA services.
  • Ensuring that non-CA partners do not influence the CA's professional judgment.
  • Adherence to the CA Code of Ethics by the CA partners.
  • Compliance with advertising and solicitation norms.
    The primary challenge is to manage potential conflicts of interest and threats to independence that can arise from shared resources, common branding, or diverse services offered within such structures.

The First Schedule of the Chartered Accountants Act, 1949, lists professional misconducts that are generally considered less severe compared to those in the Second Schedule. It is divided into four parts:

• Part I (Members in Practice): Covers acts like sharing profits with non-CAs, accepting commissions, advertising, soliciting clients, accepting appointments without communicating with the previous auditor, failing to supply information to another CA, or engaging in other businesses without permission.
• Part II (Members in Service): Covers acts like allowing a non-CA to practice in his name or entering into partnership with a non-CA.
• Part III (Members generally): Covers acts like not supplying information to the Council or its committees.
• Part IV (Other Misconduct): Covers acts that, though not professional misconduct, bring disrepute to the profession, whether in professional or other capacity.
  The key distinction from the Second Schedule is that offenses under the First Schedule typically involve a lesser degree of culpability and often relate to procedural or ethical breaches rather than gross negligence or fraud. The Board of Discipline handles these cases, and penalties can range from reprimand to removal of name from the Register for up to three months.

Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories:

1. Safeguards created by the profession, legislation, or regulation: These include educational, training, and experience requirements for entry into the profession; continuing professional development requirements; corporate governance regulations; professional standards; professional or regulatory monitoring and disciplinary procedures; and external review by a legally empowered third party of the firm’s quality control system.
2. Safeguards in the work environment: These are firm-specific or client-specific.
   • Firm-wide safeguards: Include leadership emphasizing compliance with fundamental principles, quality control policies and procedures, documented internal policies for maintaining independence, and rotation of senior personnel.
   • Engagement-specific safeguards: Include involving an additional professional accountant to review the work, consulting an independent third party, rotating senior engagement team personnel, and disclosing to the audit committee or those charged with governance the nature of services provided and fees charged.
     The effectiveness of safeguards depends on the facts and circumstances of each situation.

The Code of Ethics outlines five fundamental principles: 1) Integrity (straightforward and honest), 2) Objectivity (not allow bias, conflict of interest or undue influence), 3) Professional Competence and Due Care (maintain professional knowledge/skill), 4) Confidentiality (respect confidentiality of information), and 5) Professional Behavior (comply with relevant laws and avoid discreditable actions).

The Code of Ethics and the CA Act, 1949, contain strict provisions regarding fees and commissions to uphold integrity and objectivity.

• Prohibition on Commissions/Brokerage: Clause (2) of Part I of the First Schedule prohibits a member in practice from paying or allowing, directly or indirectly, any share of the profits of his professional work or any brokerage or commission to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner. Similarly, Clause (3) prohibits accepting such payments. This is to prevent undue influence and maintain independence.
• Contingent Fees: Clause (10) of Part I of the Second Schedule prohibits a member in practice from charging or offering to charge, accept or offer to accept, any fees which are contingent upon the findings or results of such services. This is because contingent fees can impair objectivity and independence, as the CA's remuneration would depend on a specific outcome, creating a self-interest threat.
• Reasonable Fees: While not explicitly prohibited, fees should be reasonable and commensurate with the services rendered, considering factors like time spent, skill required, complexity, and professional responsibility involved. Undercutting fees to solicit work can also be seen as unprofessional.

Professional misconduct under the First Schedule includes acts like allowing someone else to practice in their name, sharing fees with non-CAs, securing work through solicitation or advertising (except as permitted), accepting audits without communicating with the previous auditor, and charging contingent fees.

The five fundamental principles are:

1. Integrity: To be straightforward and honest in all professional and business relationships.
2. Objectivity: To not allow bias, conflict of interest, or undue influence of others to override professional or business judgments.
3. Professional Competence and Due Care: To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service based on current developments in practice, legislation, and techniques; and to act diligently and in accordance with applicable technical and professional standards.
4. Confidentiality: To respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties.
5. Professional Behaviour: To comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession.
   These principles are crucial as they form the bedrock of public trust and confidence in the profession. They guide CAs in making ethical decisions, ensuring the quality of services, and upholding the reputation of the profession.

The principle of confidentiality requires a professional accountant to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose. This principle applies even after the termination of the relationship.
Breaches of confidentiality are generally prohibited, but there are specific circumstances where disclosure is permitted or required:

1. Legal Duty to Disclose: When disclosure is required by law (e.g., production of documents in legal proceedings, reporting under anti-money laundering laws, or reporting fraud under Section 143(12) of the Companies Act, 2013).
2. Professional Duty or Right to Disclose: When disclosure is required by professional standards (e.g., peer review, quality review, responding to an inquiry or investigation by ICAI disciplinary bodies).
3. Client Consent: When the client explicitly authorizes the disclosure, provided it is in the client's interest and not against public policy.
   When disclosing, the CA must ensure that only the necessary information is revealed and to the appropriate parties.

Peer Review is a system of reviewing the work of a practicing Chartered Accountant firm by another practicing Chartered Accountant firm (the "reviewer") to ensure that the reviewed firm is complying with the technical, professional, and ethical standards laid down by the ICAI. It is mandated by the ICAI for certain categories of firms.
Contribution to Ethical Standards and Quality:

1. Quality Assurance: It ensures that the professional services rendered by the firm are of high quality and adhere to pronouncements issued by the ICAI.
2. Compliance with Standards: It checks compliance with auditing and accounting standards, as well as the Code of Ethics.
3. Ethical Conduct: The review process specifically examines whether the firm has adequate systems and procedures in place to ensure compliance with ethical requirements, including independence, confidentiality, and professional competence.
4. Continuous Improvement: It provides constructive feedback to the reviewed firm, helping them identify areas for improvement in their practice management, quality control, and ethical compliance.
5. Public Confidence: By promoting quality and ethical conduct, Peer Review enhances public confidence in the services provided by CAs.

A conflict of interest arises when a professional accountant has a personal interest or relationship that could inappropriately influence their judgment or behavior in performing a professional service. It can create self-interest, familiarity, or advocacy threats.
Identification: CAs must proactively identify potential conflicts by:

• Assessing the nature of the engagement and the client's business.
• Considering their own personal and financial interests.
• Reviewing relationships with other clients, family members, and business associates.
• Implementing firm-wide policies and procedures for conflict checks.
  Management: Once identified, conflicts must be managed to eliminate or reduce threats to an acceptable level using safeguards:
• Disclosure: Informing the affected clients or parties about the conflict and obtaining their informed consent.
• Withdrawal: Declining to perform the service if the conflict cannot be adequately managed.
• Structural Safeguards: Implementing internal controls like separate engagement teams, physical segregation of duties, or independent reviews.
• Documentation: Documenting the nature of the conflict, the safeguards applied, and the consent obtained.
  The overriding principle is to ensure that objectivity and integrity are not compromised.

Auditor independence is paramount to ensuring the credibility of financial statements. It encompasses both independence of mind (state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment) and independence in appearance (avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an assurance team member’s integrity, objectivity, or professional skepticism has been compromised).
The Companies Act, 2013 (Section 144), specifically prohibits auditors from rendering certain non-audit services directly or indirectly to their audit clients or its holding/subsidiary companies. These prohibited services include:

• Accounting and bookkeeping services.
• Internal audit.
• Design and implementation of any financial information system.
• Actuarial services.
• Investment advisory services.
• Investment banking services.
• Rendering of outsourced financial services.
• Management services.
• Any other kind of services as may be prescribed.
  The ICAI Code of Ethics further elaborates on these threats (e.g., self-review threat from providing accounting services, advocacy threat from investment banking) and requires CAs to evaluate and mitigate any threats to independence arising from non-audit services not explicitly prohibited by law. If safeguards cannot reduce the threat to an acceptable level, the auditor must decline the non-audit service or withdraw from the audit engagement. The intent is to prevent situations where the auditor might be auditing their own work or promoting the client's interests, thereby compromising objectivity.

The Code of Ethics identifies five categories of threats to independence:

1. Self-interest threat: The threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behavior. Example: A CA holding a significant financial interest in an audit client.
2. Self-review threat: The threat that a professional accountant will not appropriately evaluate the results of a previous judgment or service performed by the professional accountant, or by another individual within the firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service. Example: A CA auditing financial statements that they previously prepared for the same client.
3. Advocacy threat: The threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised. Example: A CA acting as an advocate for an audit client in litigation or disputes with third parties.
4. Familiarity threat: The threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work. Example: A long association of senior personnel with an audit client.
5. 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 professional accountant. Example: A client threatening to replace the CA firm if a particular accounting treatment is not agreed upon.

The Chartered Accountants Act, 1949, provides a robust disciplinary mechanism. When a complaint of professional or other misconduct is received against a member, it is first examined by the Director (Discipline). If a prima facie case is found, the Director (Discipline) refers the case to the Board of Discipline (for misconduct under the First Schedule) or the Disciplinary Committee (for misconduct under the Second Schedule or both Schedules).

• Board of Discipline: Consists of a Presiding Officer (with judicial experience), two members from the Council, and two government nominees. It deals with cases under the First Schedule. Its findings are generally final, but an appeal lies to the Appellate Authority.
• Disciplinary Committee: Consists of a Presiding Officer (President or Vice-President of ICAI), two Council members, and two government nominees. It deals with cases under the Second Schedule. Its recommendations are submitted to the Council, which then passes an order. An appeal against the Council's order also lies to the Appellate Authority.
  The Appellate Authority is a separate body constituted by the Central Government to hear appeals against the orders of the Board of Discipline or the Council.

The rules regarding advertising and solicitation by CAs in India are primarily governed by Clause (6) of Part I of the First Schedule to the CA Act, 1949, which prohibits a member in practice from soliciting clients or professional work directly or indirectly by circular, advertisement, personal communication, or interview.
However, the ICAI has issued guidelines that permit certain forms of advertising, provided they are in a dignified manner and do not amount to soliciting. Permitted activities include:

• Maintaining a website with static information (name, address, services offered, qualifications, etc.).
• Issuing advertisements in newspapers/journals for staff requirements or change of address.
• Issuing public notices for change of firm name or constitution.
• Participating in seminars, conferences, and writing articles, provided they do not mention specific services or solicit work.
  The core principle is that advertising should be factual, objective, and not self-laudatory or misleading. Direct solicitation of clients or making comparisons with other professionals is strictly prohibited to maintain the dignity and ethical standards of the profession.