Applicability Of Code Of Ethics For Practicing Firms

With the failure of many companies accompanied with financial scandals, there has been a growing mistrust which led to the questioning of the auditor’s role including auditor’s ethics during the audit of financial statement since the auditor has been perceived as an agent acting in public interest. The audit report is not only used by the stakeholders of the company but also it has impact on the third-party beneficiaries.

The ethical dilemma faced by accountant today is quite different from what was faced by them a few years back as the professional scope has increased manifold. The professional scope has not only widened, it has also crossed the geographical areas. Audit professionals are rendering services not only to domestic clients but also to international clients or international clients having a domestic presence.

Keeping in consideration the above-mentioned business situations and dilemma of the audit professionals, the ICAI has issued a revised Code of Ethics 2019 which is applicable from 1^st April, 2020. The purpose of the Code is to promote an ethical culture in the auditing profession as the society in general including the stakeholders, bankers, income tax authorities impose tremendous trust in the profession. A code of ethics is necessary and appropriate for the profession of auditing, founded as it is on the trust placed in its objective assurance about risk management, control, and governance.

The Code of Ethics list down the fundamental principles which the auditing professionals are required to follow. The fundamental principles include:

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

The conceptual framework which helps the auditor to adhere with the fundamental principles laid down for the auditing professionals includes

1. Identification of threats to the fundamental principles
2. Evaluation of the threats identified
3. Addressing the threats & reducing the threats to an acceptable level

The threats as mentioned in the conceptual framework could be:

1. Self-interest threat which could be auditor having direct or indirect financial interest in the client or quoting of reasonably low fees to obtain the engagement.
2. Self-review threat which could be the auditor providing assurance report on the activity which he had done himself / done by network of firms
3. Advocacy threat which includes auditor acting in favour of the client
4. Familiarity threat which may include long association with the client or having any relationship with KMP or director of the client
5. Intimidation threat which may include cases where the auditor may feel the pressure to agree with the judgement of the client.

The below section focuses on the Code of Ethics for the practicing firms.

Independence

A practicing auditor who is generally engaged in providing assurance services, it is very important for him to remain independent. Thus, it becomes important for the auditor to have proper evaluation & identify the circumstances before accepting any engagement. Evaluation of independence is a regular process due to changes over time in the nature of service, new interest and relationships.

The matter of independence becomes prominent if the firm is part of network of firms. The threat to independence may exist due to interests and relationships of a network firm.

Confidentiality

The fundamental principal of confidentiality has gained importance over a period of time specifically due to sharing of the information between network of firms, seeking guidance from third party or sharing with regulatory authorities.

Considering the above factors, it is important for an auditor to decide whether to accept the assignment or reject the same. The steps taken for either of the cases needs to appropriately documented which can also include the predecessor auditor to provide any knowledge of threat before accepting the engagement.

Professional fees or other type of remuneration including inducements

Quoting of fees is important consideration as quoting of lower or higher fees may create self interest threat. However, quoting of high or low fees per se is not unethical. However, the consideration of fees will not be applicable if the fees is decided by any regulatory body. Fees based on percentage of profit or any contingent findings, or result is any work is not allowed except in few cases like acting as liquidator, valuer for the purpose of direct tax & duties, fund raising or debt recovery services. The details of such exception can be found in Regulation 192 of The Chartered Accountant Regulations, 1988.

Inducements can be gifts, hospitality, Entertainment, Political or charitable donations, appeal to friendship or loyalty. It is basically action or situation with the motive to influence individual’s behaviour. Whether the inducement is to improperly influence the behaviour requires professional judgement. As a guideline, inducement can be acceptable, if it is part of customary or cultural practice or professional service like lunch in connection with business meeting.

Custody of client assets

Assuming the custody of client asset like money or any other assets (other than for purpose of audit) can only be done if it is permitted by any law.

Non compliance with laws & regulations of audit engagement of listed entities

It is important to understand the effect of the non-compliance of the laws and regulations directly effecting the financial statements. The non-compliance could affect the operating aspects and its ability to continue as going concern. Since the auditor is working on behalf of public interest, it is important for the auditor to communicate the non-compliance to the client at the appropriate level and appropriate time or any other regulatory authority as prescribed in any of the act or include in the auditor report (as per the requirement and case to case basis)

In case of group companies, it becomes very important for the group auditor to review the impact of non-compliance in the group financial statements.

Documentation of the non-compliance / suspected non-compliance and discussion with management / Those Charged with Governance or to the third party (as required by statue).

Following are few of the responses to queries with respect to Code of Ethics

Source:

1. Revised Code of Ethics 2019 issued by ICAI
2. FAQs on Ethical Issues issued by ICAI