The Institute of Chartered Accountants of India (ICAI) has notified the applicability of the revised 12th edition of code of ethics with effect from 1st July 2020. It was announced at the council’s 393rd meeting.
The revised Code is based on the 2018 edition of the Code of Ethics issued by the International Ethics Standards Board for Accountants (IESBA). The existing Independence sections (290 and 291) have been characterized as Independence Standards (Parts 4A and 4B) in the new Code. There is a new pattern of structuring each Section. The parts are shown as Requirements establish general and specific obligations to be complied with by the members, while the Application material provides context, explanations, suggestions or actions, illustrations, and other guidance to assist in complying with the requirements.
According to the revised Code, there are dedicated provisions that apply to all professional accountants in all circumstances, when dealing with ethics and independence issues. There is the emphasis that if threats cannot be addressed, the professional Accountant must decline or end the specific professional activity. The Accountant is required to form an overall conclusion about whether the actions he takes, or intends to take, to address the threats created to eliminate those threats or reduce them to an acceptable level.
The revised edition of the Code has been made compatible with Indian conditions so that it does not contradict with Indian domestic law. Further, the provisions of the Revised Code have been aligned with the provisions of Companies Act, 2013.
While the revised Code retains the fundamental ethical principles from the earlier code, it covers a refreshed approach and contains certain new/ substantially revised requirements.
Some of the new requirements include;
- Certain additional terms such as Public Interest Entity (in the context of the application of certain independence provisions- Employment with an audit client, Long Association of personnel, Non-assurance services to Audit client), Key Audit Partner (in the context of partner rotation), “Relative” as defined under the Companies Act, 2013 are reckoned if the client is a company while “immediate family” and “close family” are reckoned in case of other clients, Responding to Non-Compliance of Laws and Regulations (NOCLAR)
- Section for Chartered Accountants in service considering the fundamental and crucial role played by such accountants in the financial reporting supply chain and facilitating effective governance in organizations.
- Enhanced description of inducements with a view to responding to continuing concerns about bribery and corruption.
- Stronger independence provisions concerning the long association of personnel (including partner rotation) with audit clients.
- A more robust framework for addressing a breach of the requirements of the Code.
- The section dealing with „Management Responsibilities‟. The Code contains a description of activities that would, and would not, be generally regarded as a management responsibility and provides enhanced guidance.
- Requirement restricting audit team members and Key Audit Partners from being compensated for providing non-assurance services to audit clients.
- Requirements and applicable guidance addressing situations where, as a result of a merger or acquisition, an entity becomes a related entity of an audit client, to assist the Chartered Accountant in evaluating previous or current interests and relationships.
- Provisions relating to threats that are created by certain tax services.
- Requirement where the total gross annual professional fees from the audit client and its related entities exceed 15% of the total fees of the firm for two consecutive years.
- Detailed independence requirements included for assurance
- Auditor rotation requirements included under various local regulations.
In particular, responding to Non-Compliance of Laws and Regulations (NOCLAR) is one of the new features in the revised Code. In the course of providing a professional service to a client or carrying out professional activities for an employer, a professional accountant may come across an instance of NOCLAR or suspected NOCLAR committed or about to be committed by the client or the employer, or by those charged with governance, management or employees of the client or employer. Recognizing that such a situation can often be a difficult and stressful one for the professional accountant, and accepting that he has a prima facie ethical responsibility not to turn a blind eye to the matter, the IESBA has incorporated this feature to help guide the professional accountant in dealing with the situation and in deciding how best to serve the public interest in these circumstances.
Due to prevailing conditions due to COVID-19 the following provisions of Volume-I of Code of Ethics, 2020 be deferred until further notification:-
- Responding to Non-Compliance of Laws and Regulations (NOCLAR) [Sections 260 and 360]
- Fees – Relative Size [Paragraphs 410.3 to R410.6]
- Taxation Services to Audit Clients [Subsection 604]
With the exception of aforesaid provisions, all other provisions of the revised Code of Ethics are applicable w.e.f 1st July 2020.