Chapter 19: Professional Ethics & Liabilities of Auditors
1. Fundamental Principles & Independence Threats
Every Chartered Accountant must adhere to 5 Fundamental Ethical Principles:
| Fundamental Principle | Ethical Mandate |
|---|---|
| 1. Integrity | Be straightforward and honest in all professional and business relationships. |
| 2. Objectivity | Not compromise professional judgment because of bias, conflict of interest, or undue influence. |
| 3. Professional Competence & Due Care | Attain and maintain professional knowledge and skill; act diligently and in accordance with technical standards. |
| 4. Confidentiality | Respect confidentiality of client information acquired during professional service. |
| 5. Professional Behaviour | Comply with relevant laws and regulations and avoid any conduct that discredits the profession. |
The 5 Threats to Independence
1. Self-Interest Threat: Financial or personal interest in client (e.g., owning shares, fee dependency).
2. Self-Review Threat: Evaluating results of a previous judgment made by the auditor themselves (e.g., preparing accounting records then auditing them).
3. Advocacy Threat: Promoting a client's position to the point that objectivity is compromised (e.g., acting as legal advocate in a lawsuit).
4. Familiarity Threat: Sympathetic to client interests due to close or long relationship (e.g., auditor tenure > 10 years, close relative as CFO).
5. Intimidation Threat: Being deterred from acting objectively by actual or perceived pressures (e.g., threat of replacement, litigation).
2. First Schedule: Master 12 Clauses of Part I & Other Parts
| Clause # | Subject Matter | Key Rules & Exceptions |
|---|---|---|
| Part I Cl 1 | Allows any person to practice in his name | Prohibited unless such person is also a CA in practice and is in partnership with or employed by him. |
| Part I Cl 2 | Pays or shares fee / commission / profits | Prohibited to pay/share fees with any non-member. Exceptions: Partner, retired partner, legal heirs of deceased partner, members of recognized bodies (CS, CMA, Bar Council). |
| Part I Cl 3 | Accepts share in profits / fees | Prohibited to accept share of fees from non-members (lawyers, brokers, agents). |
| Part I Cl 4 | Enters into partnership | Prohibited to partner with anyone other than a CA in practice or member of recognized professional bodies under Regulation 53B. |
| Part I Cl 5 | Secures professional work through non-associates | Cannot secure work through agents or persons not qualified to be his partner. |
| Part I Cl 6 | Soliciting clients or professional work | STRICTLY PROHIBITED by circular, advertisement, personal communication. Exceptions: Responding to tenders satisfying minimum fee criteria; applying to fellow members for work. |
| Part I Cl 7 | Advertising designations & achievements | Cannot advertise other designations (e.g. Income Tax Consultant, Ex-President) on letterheads/signboards. Permitted: Only "Chartered Accountant", academic degrees, networking logo as per guidelines. |
| Part I Cl 8 | Accepting audit without prior communication | MANDATORY: Must communicate in writing with previous auditor before accepting appointment. Communication must be via Registered Post AD / Speed Post / Hand delivery with receipt / Valid email. |
| Part I Cl 9 | Verifying compliance of Sec 139 / 140 | Must ascertain whether the requirements of Sections 139 and 140 of Companies Act regarding appointment/removal have been complied with. |
| Part I Cl 10 | Contingent Fees / Fees as % of profits | Prohibited to charge fees based on % of profits or contingent upon findings. Exceptions: Liquidator, Valuer under Insolvency Code, Debt recovery valuer, Non-assurance services permitted by Council. |
| Part I Cl 11 | Engaging in other business / occupation | Requires prior approval of Council under Regulation 190A. General Permission: Director Simpliciter, authoring books, teaching up to 25 hours per week. Specific Permission: Active MD, full-time business. |
| Part I Cl 12 | Allows non-CA / non-partner to sign reports | Only a CA in practice and a partner of the firm can sign audit reports on behalf of the firm. |
| Part II (1 & 2) | CAs in Service Misconduct | Cl 1: Sharing emoluments with non-CAs; Cl 2: Accepting kickbacks/commissions from suppliers or vendors. |
| Part III (1–3) | Members Generally | Cl 1: Not being a fellow, acts as a fellow; Cl 2: Does not supply info called for by ICAI; Cl 3: Gives false information to ICAI. |
| Part IV (1 & 2) | Other Misconduct | Cl 1: Conviction for an offence punishable with imprisonment < 6 months; Cl 2: Conduct bringing disrepute to the profession. |
3. Second Schedule: Master Breakdown (Parts I, II & III)
| Part & Clause | Nature of Offence / Professional Misconduct |
|---|---|
| Part I Cl 1 | Disclosing confidential information acquired in professional capacity without consent of client or legal duty. |
| Part I Cl 2 | Certifying report without examination of financial statements by self, partner, or employee. |
| Part I Cl 3 | Vouching prospective financial information (PFI) or estimating earnings contingent on future transactions in a manner leading to belief that he vouches for accuracy of forecast. |
| Part I Cl 4 | Substantial Interest: Expressing opinion on FS of an enterprise in which the CA, partner, or relative has a substantial interest. |
| Part I Cl 5 | Failure to disclose material fact known to him which is not disclosed in FS, but disclosure of which is necessary to prevent FS from being misleading. |
| Part I Cl 6 | Failure to report a material misstatement known to him to appear in FS with which he is concerned in a professional capacity. |
| Part I Cl 7 | Gross Negligence: Does not exercise due diligence, or is grossly negligent in the conduct of his professional duties. |
| Part I Cl 8 | Failure to obtain SAAE sufficient to warrant expression of an opinion. |
| Part I Cl 9 | Failure to invite attention to material departures from generally accepted procedure of audit. |
| Part I Cl 10 | Misuse of client money: Fails to keep moneys of client in separate banking account or uses it for unauthorized purpose. |
| Part II (1–4) | Members Generally: Cl 1: Contravenes Act, regulations, or guidelines; Cl 2: Being an employee, discloses confidential info; Cl 3: Submits false info to ICAI; Cl 4: Defalcates or embezzles money. |
| Part III | Other Misconduct: Conviction by a competent court for an offence punishable with imprisonment exceeding 6 months. |
4. Disciplinary Mechanism & High-Yield Council Guidelines
| Disciplinary Authority | Offences Handled | Maximum Punishment Powers |
|---|---|---|
| Board of Discipline (Sec 21A) | Offences in the First Schedule only. | • Reprimand member. • Suspend from practice up to 3 months. • Fine up to ₹ 1,00,000. |
| Disciplinary Committee (Sec 21B) | Offences in the Second Schedule OR both Schedules. | • Reprimand member. • Suspend from practice for any period / permanently remove. • Fine up to ₹ 5,00,000. |
Critical High-Yield Council Guidelines
• Tax Audit Limits (Sec 44AB): A CA in practice / partner can accept a maximum of 60 Tax Audits per financial year.
• Statutory Audit Limits (Sec 141(3)(g)): Max 20 company audits per partner (excluding OPC, dormant, small cos, and private cos with paid-up capital < ₹100 Cr without default).
• Fee Ceiling / Independence: A member/firm shall not accept statutory audit of an entity if gross fees from that entity & its group exceed 40% of total gross fees of the firm in that year (does not apply to audits of banks/govt cos/PSUs or firms with gross receipts ≤ ₹50 Lakhs).