Code of Ethics — Disciplinary Mechanism of ICAI

    Readers may recall that part I of my article on this topic was published in the BCA journal for May 2009. In the first part, I discussed the broad para-meters such as — the importance of Code of Ethics (COE), important statistics about the disciplinary cases, reasons for delays in disposal, procedure adopted by the Council prior to the CA Amendment Act, 2006, criteria adopted by the Council, perception of various agencies towards the COE, types of punishments, and so on. I also narrated a few real-life instances of complaints. It is my experience that whenever our fellow members hear me on this topic, they confess that it is an eye-opener. Indeed, it makes one lose one’s sleep at least for a few nights. It calls for lot of awakening since people have realised the nuisance value of the complaint. The most unfortunate part is that our own members out of petty self-interests, rivalry, mean-mindedness etc., bring the other members into serious trouble. At the same time, all of us need to do lot of introspection.

2. Certain important changes :

    In recent years, there were quite a few changes brought about either by the Amendment Act, 2006 or by different Notifications/decisions of the Council. These are in respect of both — the substance as well as the procedure. A few highlights that directly affect an average practitioner are enumerated below :

    2.1 Clause (4) of Part 1 of Second Schedule earlier read as follows :

    ‘expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has a substantial interest, unless he discloses the interest also in his report;

    In the amendment, the last part — ‘unless he discloses the interest also in his report‘ is deleted. This means that now there is a blanket ban — and mere disclosure of interest is not a saving grace.

    2.2 Clause (12) of Part I of First Schedule pertained to undercutting of fees. Quite intriguingly, this has been omitted. Basic intention was to remove rigidity in this regard, since situations do change.

    2.3 Clause (7) of Part I of Second Schedule — the most important Clause — earlier read as follows :

    ‘is grossly negligent in the conduct of his professional duties’.

    Now the following words are added at the beginning :

    ‘does not exercise due diligence, or is grossly negligent’.

    It had been held by courts that this charge is not of ‘inefficiency’, but of gross negligence. Mere error or blunder or negligence is not ‘gross negligence’.

    2.4 Henceforth, internal auditor will not be eligible to be appointed as tax auditor (applicable for financial year 2009-10 and onwards).

    2.5 In the procedure,

    (a) Form of complaint (Form 8) is changed as Form I.

    (b) Filing fee raised from Rs.100 to Rs.2,500

    (c) In a restricted sense, withdrawal of complaint has been introduced.

    (d) For the first time, monetary punishment has been introduced.

3. The new system :

    The main elements of the erstwhile system were :

    (a) Complaint, written statement by respondent, rejoinder by complainant and respondent’s reply to rejoinder.

    (b) ‘Prima facie’ opinion about the ‘guilt’ — by the Council.

    (c) Reference to and hearing by Disciplinary Committee (Fact-finding report).

    (d) Final decision by the Council —

    re : Schedule I — ‘Guilt’ as well as ‘punishment’.

    re : Schedule II — Recommendation to High Court for deciding the guilt as well as the punishment.

    In the new system [refer The Chartered Accountants Procedure of Investigation of Professional and Other Misconduct of Cases] there will be :

    (a) Complaint, written statement and rejoinder — No second inning for respondent.

    (b) Decision regarding ‘prima facie’ guilt will be by the Director — Discipline. (DD)

    (c) If prima facie guilty, then enquiry will be by Board of Discipline (BOD) for Schedule I offence. For Schedule II, or for mixed case of Schedule I and II it will be by Disciplinary Committee (DC). No further reference to the Council.

    (d) Concept of ‘summary disposal’ introduced.

    (e) Aggrieved party can approach ‘Appellate Authority’. (AA)

    (f) If DD opines that there is no ‘prima facie’ guilt, DD has to seek concurrence from BOD or DC as the case may be.

    (g) For withdrawal also, DD has to seek concurrence from BOD/DC.

    In respect of all these stages, more rigid time schedules are prescribed. The power to grant extension of time is also restricted. This will speed up the disposal.

4. Constitution of BOD/DC/AA :

    Previously, all members of Disciplinary Committee were Chartered Accountants and Central Council members. Henceforth,

    BOD will consist of :

    Rule 21A(1) — The Council shall constitute a Board of Discipline consisting of :

    (a) a person with experience in law and having knowledge of disciplinary matters and the profession, to be its presiding officer;

    (b) two members one of whom shall be a member of the Council elected by the Council and the other member shall be nominated by the Central Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy;

    (c) the Director (Discipline) shall function as the Secretary of the Board.

    DC will consist of :

    21B(1) — The Council shall constitute a Disciplinary Committee consisting of the President or the Vice-President of the Council as the Presiding Officer and two members to be elected from amongst the members of the Council and two members to be nominated by the Central Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy;

Provided that the Council may constitute more Disciplinary Committees as and when it considers necessary.

AA will consist of:

 1) The Central Government shall, by Notification, constitute an Appellate Authority consisting of :

a) a person who is or has been a Judge of a High Court, to be its Chairperson;

b) two members to be appointed from amongst persons who have been members of the Council for at least one full term and who is not a sitting member of the Council;

c) two members to be nominated by the Central Government from amongst persons having knowledge and practical experience in the field of law, economics, business, finance or accountancy.

2) The Chairperson and other members shall be part-time members.

Thus, people from outside the profession will also now sit in judgment.

5. Under the old Act (prior to amendment in 2006) the Council had a power in terms of clause of Part II of Second Schedule to the Act, to issue Notifications. Under these Notifications, Council could provide that a breach of any of its Notifications would be regarded as a misconduct. Under the amended Act, such power is missing. As a consequence, Notifications issued between 1965 to 2004 stand repealed with effect from 8-8-2008.

In lieu of these, the ICAI has now issued ‘Council General Guidelines – 2008’ by a Notification dated 8-8-2008. These are published at page nos. 686 to 689 of CA journal of October 2008. More or less, these are the same ones as were issued between 1965 to 2004. (See page 333 of BCA journal, November 2008 ICAI  and  its Members)

Guidelines and self-regulatory measures can be found from page 313 to 327 in the publication Code of Ethics. – Revised edition published in January 2009.

The  Guidelines pertain to :

    i) Conduct  of a member  being  an employee.

    ii) Prohibition of appointment of member as cost auditor.
    
iii) Prohibition on expressing an opinion on financial statements of a relative.

    iv) Maintenance  of books  of account  by members,

    v) Ceiling on tax audit assignments (Max. 45 nos. other than clause (c) of S. 44AB of Income-tax Act, 1961)

    vi) Appointment of an auditor where undisputed audit fees of previous auditor are unpaid.

    vii) Maximum number of audit assignments under Companies Act, 1956 (overall ceiling of 30 nos. despite the ceiling/liberties specified in Companies Act). Members are required to maintain a register of audits done.

    viii) Ceiling on fees for other assignments of the same client whose statutory audit is done by a member.

    ix) Not to accept audit where member is indebted for more than Rs.10,000.

    x) Directions  on unjustified  removal  of auditors.

    xi) Minimum   audit  fees  in certain  cases.

CA Regulations 1988 have also  been amended.

Other recommended self-regulatory measures:

    i) Branch audit and joint audit vis-a-vis no. of partners.

    ii) Ratio between  qualified  and  unqualified   staff.

    iii) Disclosure of interest by auditors in other firms.

    iv) Ceiling on the fees. Interestingly the clause re-lating to undercutting of fees is being deleted.

The  Council in its  281st meeting held from 3rd October, 2008 to 5th October 2008 at New Delhi considered an issue arising from the Guidance Note on Tax audit u/s.44AB of the Income-tax Act, 1961 as to “Whether the internal auditor of an assessee, being an individual chartered accountant or a firm of chartered accountants can be appointed as his tax auditor”.

The Council decided that an internal auditor of an assessee, whether working with the organisation or independently practising chartered accountant or a firm of chartered accountants, cannot be appointed as his tax auditor.

The said clarification of the Council has been published in the January 2009 issue of ‘The Chartered Accountants’ Journal.

The said restriction has been relaxed by further clarification.

6. Miscellaneous  points:

6.1 In para 3.2 of Part I of this article (BCAJ May 2009), I had stated a few points which are regarded as not of much consequence while deciding a case. One more such irrelevant factor is the motive behind the complaint. In many cases, respondents vehemently argue as to how the motive behind the complaint is unscrupulous or bad; or merely to settle a score against some third party. The Council is very much aware of such motives whereby the disciplinary mechanism is taken undue advantage of. However, when it comes to examining a case on facts and merits, the Council’s hands are tied. It does not give much weightage to such factors. The existence of ‘guilt’ is to be decided in an objective manner.

Conclusion:

This topic is also like a big ocean. New systems and procedures are yet to get stabilised. Hearings under the new system are yet to commence. We have to wait and watch as to how things will develop in terms of mindsets of members of various committees, particularly non-CAs, speed of disposal and so on. I have many more things to share even in respect of the existing system. I can deal with certain specific issues if I get further opportunity. A feedback from the readers will also enable me to write in a particular direction. Till then I only wish that all our readers will always remain out of this vicious net.