MODULE V

Professional Ethics and misconduct

INTRODUCTION

The ‘code of conduct’ is essentially a set of professional ethical standards regulating the
relationship of chartered accountants with their clients, employers, employees, fellow members
of the group and the public in general.

According to the International Federation of Accountants, the ethical requirements of any

accountancy body should be based on integrity, objectivity, independence, confidentiality, high
technical standards, professional competence and above all on ethical behaviour.

The Chartered Accountants Act, 1949 and the Schedules to the Act set out the acceptance forms
of behavior of the members of the profession. The conduct of the chartered accountants is judged
under provisions contained in the Chartered Accountants Act, 1949 and the Schedules thereto,
setting out different forms of behaviour, which would constitute professional and other
misconducts under the Act.

MEANING OF PROFESSIONAL ETHICS

The term ‘ethics’ refers to the moral principles. It gives rise to certain standard of conduct of
behavior, based on moral foundation. ‘Professional ethics’ are those moral standards of conduct
for the members of a profession. The code of conduct of the Institute of Chartered Accountants
of India defines professional ethics of a chartered accountant as “his behavior with their clients,
employers, employees, fellow members of the group and the public as a whole”.16.3 MEANING
OF PROFESSIONAL MISCONDUCT The term ‘professional misconduct’ has been defined in
Section 22 of the Chartered Accountants Act, 1949 as follows:“Professional misconduct shall be
deemed to include any act or omission specified in any of the schedules, but nothing in this
section shall be construed to limit or abridge in any way the power conferred or duty cast on the
council under Section 21(1) to enquire into the conduct of any member of the institute under any
other circumstances.”

SCHEDULES TO THE CHARTERED ACCOUNTANTS ACT, 1949 RELATING TO

PROFESSIONAL MISCONDUCT

There are two schedules to the Chartered Accountants Act, listing instances of professional
misconduct. The first schedule, which has three parts, contains instances of professional
misconduct, which are adjudicated by the council of the ICAI. The second schedule has two
parts that requires action of the High Court.

The First Schedule

Part I
Professional misconduct in relation to chartered accountants in practice .A Chartered Accountant
in practice shall be deemed to be guilty of professional misconduct, if he does the following:

Clause 1: Allows others to practice in his name This clause prevents unqualified persons from
practicing in the name of qualified chartered accountants. Only a qualified partner or a qualified
employee of a practicing chartered accountant can practice in his name.

Clause 2: Pays or allows to pay profit on his profession to persons other than CA According to
this clause, no commission, no brokerage or fees can be paid to third parties nor the profits of his
profession can be shared with the persons other than CA

Clause 3: Accepts or agrees to accept profit of profession from persons other than CA This
clause states that a chartered accountant in practice cannot share the profits of persons belonging
to other professions, (e.g.) lawyer, auctioneer, broker or other agents, who is not a member of the
institute.

Clause 4: Enters into partnership with a person other than a CA in practice According to this
clause, a practicing chartered accountant can take another person as a partner only if he fulfills
any of the following criteria:

1. He is a chartered accountant in practice.

2. He resides outside India, but in spite of his residence abroad is entitled to be registered as
a member.
3. His qualifications are recognized by the central government or the council of the Institute
for the purpose of permitting such partnership.
4. He shares the fees and profits of the profession both in and outside India.

Clause 5: Secures any professional business through the services of a person not qualified to be
his partner This clause prohibits a member to procure professional business through third
parties or through such means and practices as are not opened to him. The purpose of this clause
is to impose check on ugly competition amongst the chartered accountants in practice, thereby
lowering the dignity of the profession.

Clause 6: Solicits clients by circular, advertisement, personal communication or interview or by

any other means This clause bans all forms of canvassing for professional work by a chartered
accountant in practice, including issue of circulars, advertisements or personal communication or
through interviews. He should secure and retain clients by his own skill and intelligence.

Clause 7: Advertises his professional attainment or services or uses any designation other than
CA on professional documents, visiting cards, letter heads or signboard, unless it is a degree
recognized by the central government or by the Council of the Institute This clause prohibits a
chartered accountant in practice to publicize his professional attainment in any manner.

Clause 8: Accepts audit work without intimating the ex-auditor In act, this clause serves as a
safeguard for the new auditors. It enables them to know well in advance the circumstances,
which have led to his appointment, and retirement of the existing auditor
Clause 9: Accepts jobs without maintaining legal provisions regarding appointment of auditors
of the Companies Act This clause states that an auditor should ascertain first whether his
appointment is in order or not. Only then, he should accept the appointment

Clause 10: Charges or accepts fees on a percentage basis of profit or which are contingent upon
the findings or results According to this clause, the basis of calculation of professional fees
should not be related to the profits or results of an assignment except in cases permitted under
any regulations made under this act.

Clause 11: Engages himself in any occupation without permission This clause prohibits a
chartered accountant to engage himself in any trade or business other than that of a chartered
accountant. It helps in maintaining the dignity of the profession.

Clause 12: Accepts work as to constitute undercutting of fees This clause prohibits a chartered
accountant to undertake an audit assignment at terms which are lower than those offered by
another chartered accountant in practice, provided there is no change in the workload and the
degree of skill and responsibility involved. The purpose of this clause is to avoid competition
among the members of the Institute.

Clause 13: Allows others not being a member of the Institute or a member not being his partner
to sign on his behalf or on behalf of his firm According to this clause, a chartered accountant in
practice cannot allow anyone except his partner to sign financial statements on his behalf or on
behalf of his firm.

Part II

Professional misconduct in relation to members of the Institute in service

A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he

1. pays or allows to pay any person any share in the emoluments of his employment
2. accepts or agrees to accept any part of fees or gain from a lawyer, a chartered accountant
or broker engaged by such employer by way of commission or gratification
3. discloses confidential information except as and when required by law or except as
permitted by the employer.

Part III

Professional misconduct in relation to the members of the Institute in general

A member of the Institute, whether in practice or not, shall be deemed to be guilty of

professional misconduct, if he

1. includes in any statement, return or form to be submitted to the council any particulars
knowing them to be false
2. not being fellow styles himself as a fellow
3. does not provide information as required by the council.
The Second Schedule

Part I

Professional misconduct in relation to Chartered Accountants in practice requiring action

by a High Court

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he

does the following:

Clause 1: Discloses information about the client without his consent or otherwise than as
required by any law This clause prohibits an auditor to disclose any information regarding the
affairs of his client to a third party, except with the consent of his client or as required by law.

Clause 2: Certifies or submits report on financial statement without audit According to this
clause, a chartered accountant in practice cannot sign reports on financial statements or accounts
examined by outsiders. He can, however, certify the statements examined by another chartered
accountant in practice. This exception is necessary to enable two or more firms of chartered
accountants to conduct joint audit.

Clause 3: Certifies an estimate of earnings contingent upon future transactions This clause
prohibits a chartered accountant in practice to certify the accuracy of a statement showing
forecasted earnings. However, he can render assistance in the preparation of forecasted cash
flows, budgets or similar statements.

Clause 4: Expresses opinion on financial statement of any business in which he has substantial
interest, without disclosing it This clause imposes restrictions on the chartered accountant to
express his opinion on financial statements of any business in which he is directly or indirectly
interested. If he does so, he must also disclose about his interest in his report.

Clause 5: Fails to disclose any material fact known to him, which is not disclosed in financial
statement According to this clause, a chartered accountant is expected to disclose in his report
any material fact, which is known to him, but has not been disclosed in the financial statement in
order to safeguard the interest of the public.

Clause 6: Fails to report on any material misstatement known to him to appear in a financial
statement This clause in fact is complementary to the above Clause 5. In addition to disclose of
any omission of a material fact from the financial statement, the auditor should also report a
material mis-statement contained therein.

Clause 7: Is grossly negligent in the conduct of his professional duties According to this clause,
a chartered accountant is expected to show his skill and expertise so much as is expected from a
man of his caliber and status. The gross negligence on his part means utter carelessness. What
constitutes gross negligence is a matter of the actual circumstances of the individual case.

Clause 8: Fails to obtain sufficient information to warrant the expression of an opinion This
clause prohibits a chartered accountant to express an opinion on the financial statement unless he
is able to obtain sufficient evidence in this regard. The clause also requires the auditor to express
a negative opinion if the qualifications in his report are so material as to render a positive opinion
on the true and fair nature of the financial statements meaningless.

Clause 9: Fails to invite attention to any material deviation from the generally accepted
procedures of audit This clause requires that an auditor should follow the normal procedure of
audit. If he has departed from it, he must state the fact in his report.

Clause 10: Fails to keep money of the client in a separate banking account or to use such money
for the intended purposes According to this clause, an auditor should not misuse the money
deposited to him by his clients for some specific purposes. If he misuses it, it will amount to
breach of trust.

Part II
Professional misconduct in relation to members of the Institute in general requiring action by a
High Court A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if: He contravenes any of the provisions of the Act or the regulations
made there under He is guilty of such other act or omission as may be specified by the council by
notification in the gazette of India

ENQUIRY INTO CHARGES OF MISCONDUCT OF CHARTERED

ACCOUNTANTS
Section 21 of the Chartered Accountants Act, 1949 lays down the procedure of enquiry relating
to the professional misconduct of chartered accountants. It has been summarized as follows:

1. Initial processing of complaint or information On receipt of information by, or a complaint

made, the council of the Institute considers whether there is a prima facie case against the
member concerned for any professional or other misconduct. The member against whom the
complaint has been lodged, may, within 14 days of the service of the copy of complaint to him or
within such time as extended by the authority, make a written statement in his defense. If the
council is of the view that a prima facie case exists, it shall refer the case to the disciplinary
committee. However, if there does not exist any prima facie case against the respondent, the
complainant and the respondent are informed accordingly.

2. Inquiry by disciplinary committee The disciplinary committee holds an inquiry in all matters
referred to it by the council, in such manner as may be prescribed. The respondent can defend
himself before the committee either in person or through a legal practitioner or through any other
member. Thereafter, the committee shall submit the report of the result of its enquiry to the
council of the institute.

3. Consideration of the report by the council The report of the disciplinary committee is
considered by the council along with the written presentation, if any, made by the member. The
council, if necessary, refers the matter again to the disciplinary committee for its further enquiry
and report. If the council finds from the report of the committee that the member is not guilty of
misconduct, its findings are recorded accordingly and the case is terminated. But, if the council
finds that the member is guilty, it issues a notice to the concerned member asking him to state
why a disciplinary action should not be taken against him.

4. Action taken If the council finds that the member is guilty of professional misconduct
specified in the first schedule, the member is given an opportunity of being heard and may
thereafter be either reprimanded or his name be removed from the register of members for not
exceeding five years by the council. If the council decides that the misconduct is such that the
member’s name should be excluded from the register of members for a period exceeding five
years or permanently, it has to forward the case to the High Court with its recommendation
thereof. But, if the misconduct of a member is such that it does not fall within the scope of the
first schedule to the act, the council must refer the case to the high court with its
recommendations, unless, on receipt of the report of the disciplinary committee, it finds that the
member is not guilty of any misconduct. On a case being referred to the High Court, the High
Court may decide the case as it deems fit.

5. Appeals against the order of the council A member who has been reprimanded or whose name
has been removed from the register of members may prefer an appeal to the High Court against
such an order of the council. The appeal must be filed within 30 days of the date on which the
order is communicated to the concerned member. However, the High Court may accept an
appeal even after the expiry of the said period, if it is satisfied that the delay was caused by a
sufficient cause.