- May 4, 2016
- Posted by: admin
- Category: Assurance, Assurance
Ethics are as important as anything in all walks of life. These ethics gain more importance when one talks of ‘professionals’, especially those in public service. In the top league are professional accountants (or Chartered Accountants (CAs) as they are known in India) who have to comply with a set of stringent rules and regulations in their day to day professional conduct. The rules may be stricter for practicing Chartered Accountants as compared to those in service as the CAs in practice hold out a responsibility to the public at large as well.
Further, the advent of the Companies Act, 2013 has made all the individual CA practitioners as well the CA Firms to exercise more care while discharging their duties as the penalties and repercussions of non-compliance are severe.
It is noteworthy that the intent of the guidance and regulations governing the accounting profession world over is similar. This means that the rules binding a member of the Institute of Chartered Accountants of India (‘ICAI’ or ‘The Institute’) would be more or less similar to a professional accountant of any other country regulated by International Federation of Accountants (IFAC). However, there may be some additional rules as well owing to the local requirements.
In India, as soon as a person qualifies as a Chartered Accountant, he becomes bound by the Chartered Accountants Act, 1949, the Regulations made thereunder and the Code of Ethics issued by the ICAI. While the CA Act has been enacted to make provisions to regulate the profession of Chartered Accountants; the regulations supplement the Act. The Act talks about the Institute itself, its council, misconducts by the members and the consequent penalties. The Act also contains 2 schedules and a member may be guilty of professional misconduct under either or both of these Schedules. It also has different penalties for members in practice and generally.
In addition to the Act, all Chartered Accountants are also guided by a ‘Code of Ethics’. This ‘Code’, as it is known in the relevant circles is modeled on a similar Code issued by the International Ethics and Standard Board for Accountants (IESBA). IESBA is an independent standard-setting body that develops an internationally appropriate ‘Code’.
The Code was first issued by the institute in 1963 and through regular updation, continues to serve as a good guide to the members of the Institute. The practical aspects that it touches upon and the lucid language in which it has been written makes it a relevant read. It deals with various aspects in terms of the general application of the code and has also laid down the fundamental principles as under, which are again in line with the responsibility that an professional accountant should hold out:
•Professional Competence and Due Care
Also, very importantly, the Code gives a clear listing of ‘threats’ (as under) that the accountants must guard against as they may result in non-compliance with the fundamental principals.
Nature of threat Occurrence
Self-interest threats as a result of the financial or other interests of a professional accountant or of a relative
Self-review threats when a previous judgment needs to be re- evaluated by the professional accountant responsible for that judgment
Advocacy threats when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised
Familiarity threats when, because of a relationship, a professional accountant becomes too sympathetic to the interests of others; and
Intimidation threats when a professional accountant may be deterred from acting objectively by threats, actual or perceived.
‘Safeguards’ that need to be applied to these circumstances of ‘threat’ have also been given in the Code in addition to certain other important matters in the conduct of the activities of an accountant such as professional appointment, gifts and hospitality, fee and pricing etc.
In its quest to keep the members updated, the Institute, besides updating the Code of Ethics periodically, publishes a ‘Know your Ethics’ section in the monthly CA Journal in a Q&A form which gives practical examples of compliance and non-compliance with the ethical guidelines.
Further, the Institute has also issued a Standard on Quality Control (SQC) 1 which establishes standards and provides guidance regarding a firm’s responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements.
SQC1 is again an equivalent of ISQC 1 (‘Standard’) issued by International Federation of Accountants (IFAC). Every firm is required to adhere to this Standard and establish a system of quality control designed to provide it with a reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.
As stated in the SQC, it applies to all firms. However, the nature of the policies and procedures developed by individual firms to comply with this SQC may depend on various factors such as the size and operating characteristics of the firm, and whether it is part of a network.
The Standard also states the minimum inclusions in a firm’s system of quality control in terms of policies and procedures and provides a detailed guidance on the application in the day to day functioning of a firm and the management of its activities. It is also required that the quality control policies and procedures should be documented and communicated to the firm’s personnel.
Needless to say, and as the Standard also recognizes, the SQC will depend on various factors such as the size and operating characteristics of the firm, and whether it is part of a network. Multi-national firms are also driven by their internal (and in some cases, more stringent) guidelines as besides the threats and matters contained in the Code, there is also a commercial angle to it. For example, a firm may consciously choose not to accept audit clients in a certain industry (say Real Estate) due to the inherent risks in the industry.
The importance of having a good policy framework in place in a firm, encompassing all the aspects mentioned above cannot be over-emphasised. Irrespective of the size of the set-up, it has to be realized that the compliances are on an ever increasing path and once an organization grows beyond a certain level, it may become quite difficult to both instill that culture and also get the employees (who would have gotten used to working in an unregulated environment) to understand its seriousness and infact the necessity.
The perils of non-adherence to these guidelines may vary from imposition of penalty to permanent removal of the name of the member from the members’ register.
All the partners in our firm have had the opportunity of working in multi-national accounting firms, which meant that we were exposed to the way these ‘bigger’ firms function, which we have been able to put to good use in our current set-up by getting everyone to imbibe a better ethical culture. This may be in the form of having a Quality Assurance Manual in place, getting annual declaration forms signed by the employees, ensuring independence or developing mechanisms to avoid any conflicts of interest situation.
We also endeavor to keep our employees updated about the importance that we as an organisation attach to compliance with Ethics through regular Town Hall meetings and training sessions. We are aware that once an organisation adopts a good culture, it becomes a habit and no additional efforts are required to comply with it.
All in all, the cost of compliance is far less as compared to the cost of non-compliance and all firms would do well to adhere to the regulations before it is too late in this era of ever-increasing regulations and scrutiny.
Puneet heads the Assurance and Risk Advisory practice at International Business Advisors. He is a Chartered Accountant with 13 years of post qualification experience. He has rich experience in the field of accounting and auditing, due diligences and risk advisory to various mid-sized and large companies (Indian as well as trans-nationals) across various sectors. For most of his professional career he has worked with Big4 consulting firms such as KPMG and Deloitte. He has also spent a few years with Mazars India, where he was also looking at the risk management function for the organization, in addition to being a partner with the Assurance division. He regularly writes on various accounting and auditing matters. For any professional assistance, he can be reached at Puneet.email@example.com