The Ethical Standards Board (ESB) of the Institute of Chartered Accountants of India (ICAI) has issued a series of important decisions that impact the professional conduct of Chartered Accountants (CAs). These updates are critical for practicing CAs, audit firms, and finance professionals as they define what is permitted and what is restricted under ICAI’s Code of Ethics.
This article provides a detailed breakdown of these decisions along with practical insights into their implications.
1. Prohibition on Taking Agencies of UTI, GIC, and NSDL
Decision: Practicing Chartered Accountants are not permitted to take agencies of Unit Trust of India (UTI), General Insurance Corporation (GIC), or National Securities Depository Limited (NSDL).
Practical Implications for CAs:
Why this restriction?
- ICAI has strict rules on conflict of interest. If a practicing CA also acts as an agent for financial institutions like UTI, GIC, or NSDL, there could be potential bias when advising clients.
- It ensures CAs remain independent professionals and do not act as middlemen for financial products.
Who is affected?
- Chartered accountants engaged in financial services advisory.
- Audit firms that might offer investment-related consultancy services.
What should CAs do?
- Avoid signing up for any agency or commission-based work related to UTI, GIC, or NSDL.
- Focus on core services like audits, taxation, and advisory while maintaining independence.
Example:
A CA firm offering investment advisory cannot also act as an NSDL agent for demat services.
2. Due Diligence Services Allowed for CAs
Decision: Members and firms can provide due diligence services for evaluating business opportunities.
Practical Implications for CAs:
Opportunities for CAs
- This decision allows CAs to conduct due diligence for M&A, startup investments, and financial assessments.
- Helps CAs expand their advisory services portfolio beyond traditional audits.
Key Areas Where Due Diligence is Required
- Mergers & Acquisitions (M&A): Analyzing the financial health of a company before an acquisition.
- Startup Investments: Conducting due diligence for investors before they fund a business.
- Loan & Financial Structuring: Assisting banks and financial institutions in evaluating the credibility of loan applicants.
Example:
A venture capital firm hires a CA firm to conduct financial and tax due diligence before investing ₹10 crore in a startup.
Important Note: CAs must ensure due diligence services do not overlap with statutory audits for the same entity to maintain independence.
3. Restrictions on Business Responsibility & Sustainability Reporting (BRSR)
Decision:
- Statutory auditors CANNOT prepare BRSR studies for their audit clients.
- However, they can offer advisory services on BRSR for other clients.
- They can act as assurance providers for BRSR core.
Practical Implications for CAs:
Understanding BRSR
- The Business Responsibility & Sustainability Report (BRSR) is a mandatory disclosure for listed companies regarding environmental, social, and governance (ESG) practices.
- The role of auditors is limited to providing assurance services but not preparing reports for audit clients.
Who can engage in BRSR reporting?
- Non-audit firms can prepare BRSR reports for companies.
- Statutory auditors can audit BRSR reports but not create them for their own audit clients.
Example:
A listed company cannot hire its statutory auditor to prepare its BRSR report, but the auditor can perform an independent assurance check on its ESG disclosures.
4. Prohibition on Compilation Engagements for Audit Clients
Decision: CAs cannot engage in compilation engagements (preparing financial statements) for the same entity they audit, as per SRS 4410 (Standard on Related Services).
Practical Implications for CAs:
What is a Compilation Engagement?
- In a compilation engagement, CAs assist in preparing financial statements without performing an audit.
- ICAI now restricts statutory auditors from offering this service to their audit clients.
Why this restriction?
- Conflict of interest: An auditor should not be involved in preparing financial statements they later audit.
- Ensures independence in financial reporting.
Example:
If a CA firm audits XYZ Ltd., it cannot also prepare XYZ Ltd.’s financial statements for reporting.
Alternative for Clients: Companies must hire a separate firm for compilation engagements if their auditor is restricted.
5. CAs Can Accept Assignments of Mystery Audits
Decision: Practicing CAs are allowed to conduct mystery audits.
Practical Implications for CAs:
What is a Mystery Audit?
- A mystery audit is where auditors pose as regular customers to assess business operations secretly.
- Used to evaluate compliance, service quality, and fraud detection.
Who needs mystery audits?
- Retail businesses & e-commerce platforms (to verify service quality).
- Banks & financial institutions (to check compliance with KYC norms).
- FMCG & hospitality industry (to evaluate operational efficiency).
Example:
A CA firm is hired by a bank to conduct a mystery audit by visiting branches anonymously and reporting on compliance issues.
Key Compliance Note:
While CAs can conduct mystery audits, they must maintain ethical boundaries and follow guidelines set by ICAI.
Final Thoughts: Ensuring Ethical Compliance for CAs
The latest ICAI Ethical Standards Board decisions reinforce the importance of independence and professional integrity. Here’s a quick summary of how these rules affect CAs:
Key Takeaways for CAs:
- Stay compliant with ICAI’s ethical standards to avoid disciplinary actions.
- Expand advisory services carefully to align with ICAI’s rules.
- Ensure no conflict of interest in audit-related engagements.
What Should You Do Next?
- Review your current engagements to ensure compliance with the latest ICAI guidelines.
- If you’re involved in BRSR or compilation services, segregate them from audit clients.
- Explore new opportunities in due diligence and mystery audits to expand your practice ethically.
For further details, visit the official ICAI website.
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