ICAI’s latest Code of Ethics makes it easier to report violations
The ICAI’s fresh guidance will help auditors serve public interest better | Photo Credit: vladwel
The first edition of the Code of Ethics (COE) for members of the Institute of Chartered Accountants of India (ICAI) was published in 1963. Over the last 59 years, the Code has been revised by the ICAI 11 times incorporating changes that have occurred in the profession.
The 12th edition of the COE, released by the ICAI last year, comes in three volumes — probably signalling the seriousness with which the ICAI takes violations of the Code. Till recently, the COE was considered to be a list of dos and don’ts for professionals.
The latest edition of the Code shifts the focus on how threats to the members in the discharge of their duties can be minimised. From October 1, the Code has introduced provisions regarding Non-Compliance with Laws and Regulations (NOCLAR) for both members in service as well as in practice.
In the course of 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.
Recognising 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 ICAI has incorporated this feature to help guide the accountant in dealing with the situation and in deciding how best to serve the public interest in these circumstances.
Non-compliance might result in fines, litigation or other consequences for the employing organisation, with potential to materially affect its financial statements.
Importantly, such non-compliance might have wider public interest implications in terms of likelihood of substantial harm to investors, creditors, employees or the general public.
Non-compliance that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms.
Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations impacting the health or safety of employees or the public.
More coverage likely
Initially drafted to cover all professionals in service, the ICAI has decided to bring in NOCLAR to senior professionals (meaning key management personnel) in service being employees of listed companies. Professionals in practice would need to look at possible violations of NOCLAR for listed companies with a net worth in excess of ₹250 crore. The ICAI has stated that this would be extended to all listed companies in due course of time.
The emphasis on including employees in service as a part of NOCLAR is to be welcomed. In most of the accounting accidents that have occurred, it is the entity or the auditor who has been blamed whereas the people behind the accident have not been charged in most of the cases. NOCLAR provisions in the Code of Ethics should change this.
Audit Committees of companies would need to be sensitised about these provisions. In turn, they should sensitise the management. Boards of companies should frame zero-tolerance policies if anyone is found guilty under NOCLAR.
NOCLAR should be considered to be one more tool in the hands of both auditors as well as professionals in service to report violations. This would act as a corollary to the G portion of ESG (Environmental, Social, Governance) norms that companies are in the process of implementing. NOCLAR may not cleanse the corporate world of non-compliance once and for all, but it would certainly assist in deterring some who don’t want to comply with laws and regulations.
The writer is a chartered accountant