1. CPE Credit
Under the existing regulation of the ICAI members in practice have to obtain CPE credit for 90 hours in a block of three years (including 60 Hours of structured CPE credit). Members not in practice have to obtain CPE credit for 45 hours (unstructured CPE credit). For structured CPE Credit members have to attend seminars/conferences/ workshops organised by the ICAI, Regional councils, Branches of the ICAI, CPE study circles etc. Attendance at Courses Organised by other reputed C.A. Societies, C.A. Associations, Chambers etc., are not recognised for structured CPE Hours. One, Shri Arun Anandagiri, has filed an application before Competition Commission of India alleging abuse of dominant position by ICAI u/s. 4 of the competition Act, 2002, by imposing unfair and discriminatory conditions with respect to its CPE scheme.
The Commission has passed an order dated 28-02-2014 stating that there seems to be force in the allegations of the applicant that the restriction put by the ICAI in not allowing any other organisation to conduct the CPE seminars for CPE credits, creates an entry barrier for the other players in the relevant market. The commission has also noted that the ICAI is not conducting the CPE seminars and conferences on not-for-profit basis as in the accounts of ICAI for F.Y. 2012 – 13 the gross revenue from such activity was Rs. 45 crore.(i.e., 8% of its total revenue).
Accordingly, the Commission has directed the Director General (D.G.) to investigate the matter further and report to the Commission within 60 days. After receipt of the report from the D.G. the Commission will pass the final order.
2. Disciplinary Cases:
The Disciplinary Committee (DC) of ICAI has decided some cases about professional or other misconduct of members. These are reported in the publication “Disciplinary Cases VOI – I.” Page Nos. given below are from this book. Names of members are not given in order to maintain confidentiality.
(i). Case of SCS:
In this case, the complainant had alleged that (a) the member submitted wrong Income-tax Return prepared by him to the tax authorities without approval of the Company, (b) he charged fees for preparing financial reports and tax return and also charged for filing revised return of income, (c) in spite of repeated requests, the member did not give copies of the tax returns to the company, (d) he was paid Rs. 25,000/- for formation of a new company. He did not do anything in this respect and was absconding, (e) he was in possession of the Books, Vouchers, PAN Cards and Digital Signatures of Directors, copies of Tax Returns, Company’s Seal etc., and was not returning these Books, Vouchers, documents etc.
The DC noted that both the complainant and the Member did not appear at the time of hearing. They did not cooperate in the inquiry and did not furnish any statements apart from the complaint and the annexures. Further, the name of the member was removed from the Register of Members for non-payment of Fees to the ICAI. Yet, the member used to practice in two different firm names without being a partner in the firm. From the facts stated in the complaint and annexures, the committee came to the conclusion that the member was guilty of professional and other misconduct under Clause (2) of Part IV of First Schedule, CIause (7) of Part I and CIause (1) of part II of the Second Schedule to the C.A. Act. On this basis, the DC directed for removal of the name of the member from the Register of Members for a period of five years. (P. 135 to 142 – Part I)
(ii) Case of MJD:
In this case, the complainant had alleged that the member was maintaining accounts of the Firm and also acted as its Tax Auditor. Further, the member was also in active business association with the firm and the company which had taken development rights from the Firm. He was also in possession of the accounting records of the complainant but was denying the same.He refused to audit the accounts of the firm and represent the firm in subsequent years which caused huge financial loss to the Firm.
The DC observed that the member was engaged in carrying out the day-to-day business affairs of the company, being a director of the company while he was holding COP without obtaining permission of the ICAI. Further, he was maintaining accounts of the firm and acting as Tax Auditor of the Firm. It was pointed out that as per the Guidance Note on Independence of Auditors, “members are not permitted to write the books of their auditee clients.” After hearing the parties and examining the evidence on record, the DC held that the member was guilty of professional misconduct under Clause (11) of Part I of the First schedule and Clause (4) of Part I of the second schedule to the C.A. Act.
The DC noted that there were two complaints filed against the member. In the first complaint the Board of Discipline had already held the member guilty under Clause (11) of Part 1 of First schedule and directed to remove the name of the member for seven days. In view of this, in the present complaint the DC decided to “Reprimand” the member (P. 1-7 of Part I).
(iii) Case of Ms. BKD:
In this case, the member had audited accounts of a Cooperative Housing Society. In the complaint by some members of the society it was alleged that (a) the member had secured the audit through her father who was paid Accountant/Consultant of the society and (b) the member had done other illegal audits of other Housing Societies with the help of her father.
During the hearing before the DC, the member pleaded guilty and requested the DC to take a lenient view. The member submitted that she had conducted the internal audit on verbal communication from the Management Committee. However, the audit report was given in the same format as the statutory audit report. Further, she had not conducted audits of any other Housing Society as she was not on the panel of Auditors for co-operative societies. The Managing Committee had signed the annual accounts of the society and no discrepancy was pointed out by the Complainant.
The DC noted that there were certain disputes amongst the members of the society which led to the filing of this complaint. There was no resolution of the Managing Committee for the appointment of the member as statutory or internal auditor and the member had not verified this fact. On verification of the financial statements, it was noticed that they appeared to have been drawn up for statutory purposes and not for Internal Audit. However, the DC noted that there were no irregularities or deficiencies in the Financial Statements and the member had carried out her duties in a diligent manner. The present complaint was due to disputes between the members and not due to any negligence in discharging audit function by the member. On this basis, the DC held that the member was not guilty of any professional misconduct. (P. 139-143 of Part II )
3. Some Ethical Issues:
The Ethical Standards Board has given answers to some Ethical Issues on Pages 1762 – 1764 of C.A Journal for June, 2014. Some of these issues are as under:
(i) What are the measures available to a Professional Accountant in case a conflict of interest arises?
A professional accountant in public practice should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles.
A professional Accountant should evaluate the significance of any threats. Depending upon the circumstances giving rise to the conflict, he should ordinarily notify the client/all known relevant parties.
The additional safeguards would be the use of separate engagement teams, clear guidelines for members of the engagement team on issues of security and confidentiality. Regular review of the application of safeguards by a senior individual not involved with relevant client engagements should also be considered.
(ii) What is independence?
Independence requires:
Independence of Mind – The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allow- ing an individual to act with integrity, and exercise objectivity and professional skepticism.
Independence in Appearance – The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude that firm’s or a member of the assurance team’s integrity, objectivity or professional skepticism had been compromised.
(iii) What is the Conceptual Framework to Independence?
It is to be applied to specific circumstances and relationships. It gives various examples about the threats to independence that may be created by specific circumstances and relationships and also provides how professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level depending on the characteristic of the individual assurance engagement.
4. EAC Opinion:
Treatment of Commission Cost Paid to Agent in Relation to Projects
FACTS:
A company is involved in the business of designing, engineering and erection of ethanol, brewery, water and wastewater treatment plants. The company caters to both domestic and international markets. The revenue recognition of the company is governed by Accounting Standard (AS) -7, ‘Construction Contracts’ for the above mentioned line of business.
The company executes projects in international and do- mestic markets for the above mentioned business. In certain cases, the company appoints agents to undertake certain activities. The services rendered by the agent form an integral part of the project right from inception of project till the timely execution and completion of the project. The agent provides various services in the nature of procurement support, vendor short listing, and technical services etc., which are an integral part in the execution work of the project and as such. The costs towards sales commission are specific for that contract and essential for smooth execution of the project. These costs would be incurred only where the project activity is carried out for that particular contract.These are specificially identified for each project and considered in the total estimated cost of the project.
The company further stated that it presently pays compensation to these agents for the services rendered in the form of ‘sales commission’ by entering into individual agreements with them. The sales commission is decided as a percentage of contract value and the same is accrued in the books of account in proportion to the contract revenue of the respective project.
The company has also informed the committee that although the commission costs are not explicitly charged to the customer as a separate cost, these form part of the total project cost and are considered while deciding the order value. As such they are not specifically reimbursable from the customer on one to one basis.
The commission paid to the agent is treated as direct cost of the project and included in the total estimated cost of the project as sales commission cost.
QUERY:
The Company has sought the opinion of the EAC on thefollowing issues:
(i) Whether the treatment adopted by the company, of including the commission cost as part of project cost, as explained above is correct; (ii) If the treatment adopted is correct, whether the cost would be classified as direct cost of the project or cost allocable to the project; (iii) If the treatment adopted is not correct, under what head these costs can be classified under indirect expenses; and (iv) Whether the treatment adopted by the company to calculate percentage of completion including the sales commission cost comply with the revenue recognition principle as envisaged under AS7?
EAC OPINION :
The Committee after considering paragraphs 15, 19 and 20 of Accounting Standard (AS) 7, ‘Construction Contracts,’ notes that contract costs include the costs directly related to a specific contract as well as the costs that are attributable to contract activity in general and can be al- located to the specific contract.
The Committee notes from the Facts of the Case that so far as the activities of the agent related to execution of the contract activity, such as procurement support, project coordination and other technical services are concerned, the Committee is of the view that these activities are directly related to the construction contract and therefore, costs pertaining to these activities should be treated as costs that relate directly to the specific contract. Similarly, activities of the agent related to finding the prospective customer and obtaining the contract, etc can also be treated as directly related to the contract as in the case of the Company, the costs pertaining to these activities are payable only on obtaining the contract.
The Committee notes from the Facts of the Case that the agent, in the case of the Company, not only provides services in relation to securing of the contact, procurement support and other technical services relating to the execution of the project, but also facilitates and arrange ad- vance payments from the customer and ensures timely collections from them. The Committee is of the view that activities relating to the facilitation and arrangement of advance payments and final collections from the customer and other similar activities are of the nature of administration costs, which cannot be considered as attributable to construction activity and accordingly, cost of these activities should not be treated as the cost directly related or that attributable to a construction contract Therefore, the Committee is of the view that if the commission cost paid to the agents is a composite commission, the company should assess whether the latter activities and the cost in respect thereof are material and if it is so, attempt should be made to estimate the cost pertaining to these activities considering the factors such as, the cost that would have been incurred had the agent performed only these activities, etc. Accordingly, the cost incurred on selling and administration activities should not be included in contract cost.
As regards to including the commission cost for determining the stage of completion, the Committee notes from paragraph 30 of AS 7, that only those contract costs that reflect work performed should be included in costs incurred upto the reporting date. However, as per the Facts of the Case, related commission is accrued in proportion to contract revenue. In other words, such costs are not being recognised considering the performance of related services rather than the same is being recognised on the basis of contract revenue. Accordingly, the Committee is the view that inclusion of commission on this basis is not correct; rather, it should be recognised considering the performance of related service provided the commission so determined is ‘contract cost’.
[Page Nos. 1792 to 1795 of C. A. Journal – June, 2014]
5. ICAI News:
Following announcement is made by ICAI at P.1873 of C.A. Journal for June, 2014.
It has come to the knowledge of some members that certain entities, while inviting tenders for services of chartered accountants for the assignment of statutory audit, are mentioning accounting and book keeping related works in the scope of works required to done by the auditor.
Members are hereby advised not to undertake such assignment since it is violative of the provisions of ‘Code of Ethics’ and ‘Guidance Note on Independence of Auditors’ for auditor of an entity to do book keeping work of the entity. The said prohibition in the case of Companies is further also mentioned in section 144 of the Companies Act, 2013.
