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Hi Guys! The topic of today's blog is Key Highlights Of The Revised Code Of Ethics Issued By ICAI.
The Council of Institute of Chartered Accountants of India (ICAI) brought the first edition of the Code of Ethics, then Code of Conduct‟, in 1963. Since then, the Code has been constantly updated from time to time to keep it relevant to the profession.
The present (eleventh) edition of Code of Ethics, incorporates for the first time ever, the provisions of International Federation of Accountants (IFAC) Code of Ethics, thus complying with the membership obligation of ICAI towards IFAC.
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The two parts of the Code, one incorporating provisions of IFAC Code of Ethics, and the other based on the Chartered Accountants Act, 1949, complement each other and together constitute perhaps one of the best Code for a profession.
Revised Code of Ethics has been made applicable from 01st July 2020 and has been divided into 3 parts:
It has been derived from the International Ethics Standards Board for Accountants (IESBA) Code of Ethics, 2018 issued by the International Federation of Accountants (IFAC).
Check Out | Volume 1
It is based on the Chartered Accountants Act, 1949 based on domestic provisions governing the Chartered Accountants. This complements the Volume I, and makes a complete reading.
Check Out | Volume 2
This is a Case Law Referencer and incorporates all the decided/published case laws of both the Schedule till 1st April 2019.
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However, due to the prevailing situation due to Covid-19, the applicability of following provisions of Volume-I of the revised Code of Ethics has been deferred till further notification.
Check Out | ICAI Announcement
The Code contains the following material:
Complying with the Code, Fundamental Principles and III Conceptual Framework, which includes the fundamental principles and the conceptual framework and is applicable to all professional accountants.
Professional Accountants in Service, which sets out additional material that applies to professional accountants in service when performing professional activities. 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.
Professional Accountants in Public Practice, which sets out additional material that applies to professional accountants in public practice when providing professional services.Independence Standards, which sets out additional material that applies to professional accountants in public practice when providing assurance services, as follows:
Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review engagements.
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.
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Non-compliance with laws and regulations comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties:
(a) The professional accountant’s employing organization;(b) Those charged with governance of the employing organization;
(c) Management of the employing organization; or
(d) Other individuals working for or under the direction of the employing organization
Examples of Non-Compliances Includes Fraud, corruption and bribery, Money laundering, terrorist financing and proceeds of crime, Securities markets and trading, Banking and other financial products and services, Tax and pension liabilities and payments, Environmental protection etc.
If in the course of carrying out professional activities, a professional accountant becomes aware of information concerning non-compliance or suspected non-compliance, the accountant shall seek to obtain an understanding of the matter.
Depending on the nature and significance of the matter, the professional accountant might consult on a confidential basis with others within the employing organization or the Institute, or with legal counsel.
Providing a second opinion to an entity that is not an existing client might create a self-interest or other threat to compliance with one or more of the fundamental principles. A threat, for example, a self-interest threat to compliance with the principle of professional competence and due care, might be created if the second opinion is not based on the same facts that the existing or predecessor accountant had, or is based on inadequate evidence.
Examples of actions that might be safeguards to address such a self-interest threat include:
A) A professional accountant might quote whatever fee is considered appropriate. Quoting a fee lower than another accountant is not in itself unethical. However, the level of fees quoted creates a self-interest threat to compliance with the principle of professional competence and due care if the fee quoted is so low that it might be difficult to perform the engagement in accordance with applicable technical and professional standards.
B) The fees which are based on a percentage of profits or which are contingent upon the findings, or results of such work, is not allowed except in cases which are permitted under Regulation 192 of The Chartered Accountants Regulations, 1988
C) A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if a professional accountant pays or receives a referral fee relating to a client.
Disclosing to clients any referral fees paid to, or received from, another professional accountant for recommending services might address a self-interest threat.
D) When the total fees generated from an audit client by the firm expressing the audit opinion represent a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client create a self-interest or intimidation threat.
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Where for two consecutive years, the total gross annual professional fees (“total fees) from the audit client and its related entities represent more than 15% of the total fees received by the firm expressing the opinion on the financial statements of the client, the firm shall:
Disclose to those charged with governance of the audit client the fact that for two consecutive years, the total of such fees represents more than 15% of the total fees received by the firm.
Provided that no such ceiling on the total fees of the Firm would be applicable where such fees does not exceed five lakhs of rupees in respect of a firm including fees received by the firm for other services rendered through the medium of a different firm or firms in which such member or firm may be a partner or proprietor.
Provided further that no such ceiling on the total fees of a Firm would be applicable in the case of audit of government Companies, public undertakings, nationalised banks, public financial institutions or where appointments of auditors are made by the Government.
E) A self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued. When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine:
Accepting gifts and hospitality from an audit client might create a self-interest, familiarity or intimidation threat. A firm, network firm or an audit team member shall not accept gifts and hospitality from an audit client unless the value is trivial and inconsequential.
Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include:
A loan or a guarantee of a loan with an audit client might create a self-interest threat. A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to:
(a) The firm, the network firm or the individual making the loan or guarantee, as applicable; and
(b) The client.The above is subject to the Council guidelines on indebtedness, issued from time to time and the additional restrictions under the Companies Act, 2013, where applicable.
A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not accept a loan, or a guarantee of a loan, from an audit client that is a bank or a similar institution unless the loan or guarantee is made under normal lending procedures, terms and conditions.
A close business relationship with an audit client or its management might create a self-interest or intimidation threat. Example of close Business Relationship Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individuals who perform senior managerial activities for that client.
It is reiterated that the purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self-interest threat.
A self-interest, familiarity or intimidation threat might be created by family and personal relationships between an audit team member and a director or officer or, depending on their role, certain employees of the audit client.An individual shall not participate as an audit team member when any of that individual’s immediate family:(a) Is a director or officer of the audit client;(b) Is an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion; or
(c) Was in such position during any period covered by the engagement or the financial statements.
If an audit team member has recently served as a director or officer, or employee of the audit client, a self-interest, self-review or familiarity threat might be created. Factors that are relevant in evaluating the level of such threats include:
(a) A director or officer; or
(b) An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
Independence is compromised unless subsequent to the individual ceasing to be a key audit partner:
i) The audit client has issued audited financial statements covering a period of not less than twelve months; and
ii) The individual was not an audit team member with respect to the audit of those financial statements
When an individual is involved in an audit engagement over a long period of time, familiarity and self-interest threats might be created.If the individual acted as the engagement partner for seven cumulative years, the cooling-off period shall be five consecutive years
Where the individual has been appointed as responsible for the engagement quality control review and has acted in that capacity for seven cumulative years, the cooling-off period shall be three consecutive years
If the individual has acted as a key audit partner other than in the capacities set out above for seven cumulative years, the cooling-off period shall be two consecutive years
If the individual acted in a combination of key audit partner roles and served as the engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years.
In this blog, I have tried to cover the Important highlights of the Revised Code of Ethics based on my understanding and there might be some additional points based on your understanding which can be shared in comments below.