Code of Conduct for Organisations
By;
CA Kamal Garg
[B. Com (H), FCA, DISA (ICAI)]
cakamalgarg@gmail.com
Introduction
• A code of conduct is a set of rules outlining:
1. the responsibilities of; or
2. the proper practices for
an individual, party or organization
Introduction
• Responsibility refers to the managerial commitment or duty;
• Proper Practices refer to the modus operandi for executing
and fulfilling such managerial commitment or duty
• In its 2007 International Good Practice Guidance, "Defining
and Developing an Effective Code of Conduct for
Organizations",
the
International
Federation
of
Accountants (IFAC) provided the following working definition:
"Principles, values, standards, or rules of behavior that
guide the decisions, procedures and systems of an
organization in a way that:
(a) contributes to the welfare of its key stakeholders, and
(b) respects the rights of all constituents affected by its
operations."
Significance of Code of Conduct
• Code of Conduct is the standard of expected ethical
behaviour for the company's management and employees. It
is about holding oneself to the highest standards of
ethical business behaviour;
• Typically Codes talk about expectations to:
1. obey the law,
2. conflicts of interest,
3. insider trading,
4. preserving confidential information,
5. bribery,
6. corporate opportunities,
7. competition and fair dealing among other things
Legal Backing to Code of Conduct
• US Scenario:
• Section 406 of the Sarbanes-Oxley Act of 2002
("SOX") directed the Securities and Exchange
Commission to issue rules requiring each public
company to disclose whether or not it has adopted
a code of ethics that applies to certain of the
company's key officers;
• In accordance with the mandate of SOX, the SEC
adopted final rules implementing Section 406 of
SOX in January 2003
Legal Backing to Code of Conduct
• The final rules define the term "code of ethics" as written standards that
are reasonably designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
2. Full, fair, accurate, timely and understandable disclosure in
reports and documents that a company files with or submits to the
SEC and in other public communications made by the company;
3. Compliance with applicable governmental laws, rules and
regulations;
4. The prompt internal reporting of any violations of the code of ethics
to an appropriate person or persons identified in the code of ethics; and
5. Accountability for adherence to the code of ethics.
Legal Backing to Code of Conduct
• Indian Scenario:
• As per Clause 49 of the Listing Agreement,
– The Board shall lay down a code of conduct for all
Board members and senior management of the
company. The code of conduct shall be posted on the
website of the company.
– All Board members and senior management personnel
shall affirm compliance with the code on an annual
basis. The Annual Report of the company shall
contain a declaration to this effect signed by the
CEO.
Code of Conduct imbibed under
Companies Act
• Failure to maintain register of members (Section 150);
• Failure to hold annual general meeting as per law
(Section 166);
• Acting as director without holding qualification shares
(Section 272);
• Acting as a director of more than 15 companies (Section
279);
• Default in giving notice of Board meetings (Section 286);
• Failure to appoint a whole-time secretary (Section 383A)
Code of Conduct imbibed under
Companies Act
• Wrongfully withholding or wrongfully taking possession
of property of the company by an officer (Section 630);
• Failure to keep proper books of account, etc. (Section
209);
• Failure to lay balance sheet and profit and loss account
at the AGM (Section 210);
• Failure to prepare balance sheet and profit and loss
account showing a true and fair view (Section 211);
• Omission to make repayment of deposit (Section 58A)
Code of Conduct imbibed under
SEBI Act, 1992
Penalties under the SEBI Act
•
Section 15A:
1.
2.
3.
•
•
Failure to furnish any document, return or report to SEBI;
Failure to file any return or furnish any information, books or
other documents to SEBI;
Failure to maintain the books of account or records
Section 15B: Failure by an intermediary to enter into an
agreement with his client;
Section 15C: If SEBI calls upon a listed company or any
intermediary to redress the investor grievance, but fails to
redress such grievance within the time specified by SEBI
Penalties under the SEBI Act
Section 15F
Registered Stock Broker
Fails to deliver any
Security or Fails to
make pymt of the amt
due to investor
Fails to issue
Contract Note in
form and manner
prescribed by SE
Charges brokerage
in excess of that
specified in the
Regulations
Penalties under the SEBI Act
•
Section 15G: Where an Insider:
1. deals in securities of a body corporate listed on any SE on
the basis of unpublished price sensitive information
(UPSI);
2. communicates any UPSI to any person except as
required in the ordinary course of business or under any
law;
3. counsels, or procures for any other person to deal in any
securities of any body corporate on the basis of UPSI
Penalties under the SEBI Act
• Section 15HA: Person indulging in fraudulent and unfair
trade practices relating to securities;
• Section 15HB: Failure to comply with any provision of this
Act, Rules, or Regulations made thereunder or directions
issued by SEBI for which no separate penalty has been
provided;
Code of Ethics for ICAI Members
First Schedule:
Part I
Clause 1
Misconduct
Allowing any other
person to practice in
his own name
Exceptions
Other person CA in
practice; and
Is in Partnership; or
Is in his employment
Clause 5
Misconduct
Securing
professional
business through
unauthorised means
Open/ Authorised
Means
1. Employee;
2. His Partner;
3. Other Means under
Clause 6 & 7
Clause 6
Misconduct
Exceptions
Solicitation of clients
or professional work
Work from other CA in
practice
Solicitation can be direct
or
indirect
through
circular,
advertisement,
personal communication,
interview, etc.
Responding to tenders
or enquiries
Clause 7
Misconduct
Advertising
attainments
or services
Using
unapproved
or wrong
designations
Exceptions
Advertising
through
Write Up
permitted
Clause 8
Misconduct
If no written communication
with previous auditor before
accepting the position as an
auditor
Exceptions
NIL
Clause 9
Misconduct
If does not ascertain the
compliance of Sec. 224 & 225
in respect of his appointment
Clause 10
Misconduct
Fees on:
(i) % of Profits; or
(ii) Contingent
Findings
Exceptions
under Reg.
192
1. Liquidator/ Receiver;
2. Audit of Cooperative
Society;
3. D.T. Valuation
Clause 11
Misconduct
Engaging in Other
business/ occupation
Full time COP
(+)
Salary
Exceptions
1. ICAI Permission;
2. Director Simplicitor;
3. Employment in CA
Firm;
4. Sec. 2(2)(iv) & Reg.
190A
Clause 12
Misconduct
Exceptions
Allowing nonmembers to F.S.
Signing documents
not containing
expression of
opinion
Sec. 26 also states
so
First Schedule: Part I:
Clause 2
• Professional Misconduct if
• Directly or Indirectly
1. Pays; or
2. Allows; or
3. Agrees to pay or allow
Any share, commission or brokerage in the
1. Fees; or
2. Profits
Of his professional business with Non-members
First Schedule: Part I:
Clause 2
•
1.
2.
3.
4.
Exceptions:
ICAI Member;
Partner;
Retired Partner;
Legal Representative (LR) of deceased partner
–
–
Widow or LR of partner only if Deed provides;
Widow or LR of proprietor can receive only goodwill but no
participation in earnings of the firm
5. Member of other specified professional bodies;
6. Specified qualified persons
First Schedule: Part I:
Clause 3
• Professional Misconduct if:
1. Accepts; or
2. Agrees to accept
Any part of the profits of professional work
from Non-member
First Schedule: Part I:
Clause 3
• Exceptions:
1. ICAI Member;
2. Member of other specified professional
bodies;
3. Specified qualified persons
First Schedule: Part I:
Clause 4
• Professional Misconduct if:
1. Enters into partnership;
2. In or outside India
with Non-members
• Exceptions:
1. ICAI Member;
2. Member of other specified professional bodies;
3. Specified qualified persons
First Schedule: Part I:
Clause 5
• Professional Misconduct if:
1. Secures work from Non-members
•
1.
2.
3.
4.
Exceptions:
Employee;
Partner;
Other open means (e.g. Clause 6 or 7);
Persons as per Clause 2, 3 and 4
Professional Bodies
for Clause 2, 3 and 5
1.
2.
3.
4.
5.
ICSI;
ICWAI;
Bar Council;
Indian Institute of Architects;
Institute of Actuaries
Specified Qualified Persons
for Clause 2, 3, 4 and 5
1. CS;
2. CWA;
3. Bachelor in Law (from recognised University or
Institution);
4. Bachelor in Engineering;
5. Bachelor in Architecture;
6. Actuary;
7. B Tech;
8. MBA (from recognised University or Institution
recognised by AICTE)
Membership of Professional Bodies
for Clause 4
1.
2.
3.
4.
ICSI;
ICWAI;
Advocate (i.e. member of Bar Council);
Engineer (i.e. member of Institution of
Engineers);
5. Architect (i.e. member of Indian Institute of
Architects);
6. Actuary (i.e. member of Institute of
Actuaries)
First Schedule:
Part II
Clause 1
Misconduct
Paying/ allowing to any
person share in
employment emoluments
Clause 2
Misconduct
Accepting any remuneration/
commission/ gratification from
counsels/ customers of the
company/ firm
First Schedule:
Part III
Clauses
Misconduct
Clause 1:
Not FCA but
acts as FCA
Clause 2:
Does not
supply info to
ICAI/ comply
requirements
asked for by
ICAI
Clause 3:
Violation of
Clause 6/ 7
Second Schedule:
Part I
Clause 1
Misconduct
Disclosure of
information
acquired during
professional
engagement
Exceptions
1. Client’s consent;
2. Law
Requirements
Same principle also
in SA 200
Clause 2
Misconduct
Certification/
submission of
report on F.S.
without
examination
Exceptions
1. Examination under
his supervision;
2. Examination by
other CA in practice
Clause 3
Misconduct
Vouching the
accuracy of
forecasts
Exceptions
Follow AAS 35/
SAE 3400
Clause 4
Misconduct
Expression of
opinion on F.S. of
an entity with
presence of
substantial interest
(either himself/ his
firm/ his partner)
Substantial Interest
1. Co. > 20% voting
power;
2. Others > 20%
profits
Relatives of CA also
covered
Clause 8
Misconduct
Fails to obtain information for expression
of opinion
In a way, its about violation of SA 500/ SA
501
Clause 9
Misconduct
Failure to invite attention to any
material departure to Generally
Accepted Audit Procedure
Clause 10
Misconduct
1. Failure to
keep client’s
money in
separate bank
account; or
2. Use such
money within
reasonable
time
Even money
recd. in
capacity as
trustee/
liquidator,
etc. also
covered in
this clause
Exceptions
1. Fees/
remuneration
(even
advance);
2. Reasonable
time usage
Clauses
Misconduct
Clause 5
Clause 6
Failure to disclose
“Material Fact”
Failure to report
“Material
Misstatement”
Clause 7
Misconduct
Grossly Negligent of his Duties
(Vituperative Epithet)
Second Schedule:
Part II
Clause 1
Contravention of Act/ its
Provisions
Clause
2
Being employee
discloses confidential
information without
consent/ legal
requirement
Clause
3
Submits false info to ICAI/ its
Constituents
Clause 4
Defalcates or Embezzles money
recd in professional capacity
Central Council General Guidelines, 2008
(earlier referred as ICAI Notifications)
Books of Accounts
• Practicing CA/ Firm to maintain proper books
including:
1. Cash book;
2. Ledger
Tax Audit Assignments u/s 44AB
• Limited up to 45 in a financial year;
• This limit is applicable on per partner basis;
• Each year audit is a separate audit
assignment;
• Maintain record of assignments;
• Part Time practicing CA shall not be
considered
Number of Audit Assignments
under Companies Act, 1956
• Limits u/s 224(1B) + Exemptions u/s
224(1B) < 30;
• Maintain record of audit assignment;
• Limit applicable to per practicing CA;
• Part time practicing CA not counted
Minimum Audit Fees
(omitted w.e.f. June 7th 2011)
Particulars
Practising firm having 5 Practising firm having 10
or more partners but less or more than 10 partners
than 10 partners
In cities with
Rs. 6,000 p.a.
Rs. 12,000 p.a.
population of 3
million and above
In cities/ towns with
Rs. 3,500 p.a.
Rs. 8,000 p.a.
population of less
than 3 million
Undisputed Audit Fees
• Guilty if appointment as an auditor accepted
Where
• Undisputed audit fees, has not been paid by
the entity to previous auditor
• Exception : Audit of Sick Unit
Appointment as Cost Auditor u/s 233B
• Guilty if accepts appointment u/s 233B while
he is:
1. Auditor of Company u/s 224;
2. Officer or employee of company;
3. Partner or employee of (2);
4. Partner or employee of (1);
5. Indebted/ provided guarantee/ security to
company for > Rs. 1,000
Appointment as Auditor while indebted
• Guilty if:
1. Accepts appointment as auditor u/s 224 when
indebted > Rs. 1,000;
2. Accepts appointment as auditor in other cases when
indebted > Rs. 10,000;
3. If other limits given by some other statute then they
would be applicable
• Internal auditor, concurrent auditor not covered by
this Guideline;
• In case of firm, if one partner is ineligible, then whole
firm is ineligible
Remuneration for Statutory Audit
and Other Work
• Applicable to “audit and other work” of only:
1. PSU;
2. Govt. Co.;
3. Listed Co.;
4. Other Public Co. having turnover > Rs. 50
crores in a year
• Other Work Fees > Statutory Audit Fees =
Guilty of Professional Misconduct
Remuneration for Statutory Audit
and Other Work
• Other Work as per Section 2(2)(iv) &
Regulation 190A but does not include:
1. Audit under any other statute;
2. Certification work done by statutory
auditors;
3. Representation before an authority
• Guideline applicable to CA in aggregate (i.e.
collectively to their firm/ MCC/ associates
etc.)
Developing Model Code of Conduct
• Typically, a Code of Conduct for any organisation
should have the following essential elements:
1. Preamble
2. Applicability
3. Set of Rules including contribution to the society,
being honest and integral, maintaining confidentiality,
teamwork, compliance with applicable laws and
regulations, dealing with media, observing entity’s
discipline mechanism, related party transactions, etc.
4. Continuous updating the laid down code of conduct
Challenges in implementing Code of Conduct
• An important and implicit assumption of many writings on
corporate codes is that such codes do have a 'real' effect
upon behaviour;
• This tends to be something that is taken for granted, but it
is not empirically validated by subsequent investigation
• It is important to note that codes of conduct do not in
themselves invoke compliance.
• Even with a code of ethics, ethical behavior is not
necessarily assured.
• Conformance with code of conduct is influenced by three
factors, namely:
1. the extent of internalization of the codes,
2. effects of non-compliance, and
3. group identity pressures
General Observations for being
ineffectiveness of Code of Conduct
1. Majority of employees are ignorant of the code of conduct;
2. Lack of adequate and regular education of employees about
code of conduct affected its practice;
3. Senior managers never practice what the code of conduct says;
4. Code of conduct is just on paper not being practiced;
5. Code of conduct has brought about very little or no change into
the behaviour of public servants;
6. Too many inconsistencies and impartiality in administering code
of conduct have made it unsuccessful;
7. Copies of the codes are not made available to staff;
8. The language of the code of conduct is too difficult to
comprehend;
9. Code of conduct is obsolete;
10. The administrative culture does not encourage good behaviour
Model Code of Conduct*
• Preamble:
• Commitment to ethical professional conduct is a MUST for every
employee at ABC Limited in all of its businesses/ units/
subsidiaries. This code, consisting of imperatives formulated as
statements of personal responsibility, identifies the elements of
such a commitment. It contains many, but not all, issues
employees are likely to face.
• The code is intended to serve as a basis for ethical decisionmaking in the conduct of professional work. It may also serve as a
basis for judging the merit of a formal complaint pertaining to
violation of professional ethical standards.
*extracted from one of the listed company’s website
Model Code of Conduct
• Applicability:
• This code is applicable to the Board Members, members of the
Management Committee and all employees in and above Officers
level (hereinafter collectively referred to as “Employee(s)”).
• All employees must read and understand this code and ensure to
abide by it in their day to day activities.
Model Code of Conduct – Other Elements
• Contribute to society and human well-being:
• This principle concerning the quality of life of all people affirms an
obligation to protect fundamental human rights and to respect the
diversity of all cultures. We must attempt to ensure that the
products of our efforts will be used in socially responsible ways,
will meet social needs and will avoid harmful effects to health and
welfare of others
• Avoid harm to others:
• "Harm" means injury or negative consequences, such as loss of
property, property damage or unwanted health and environmental
impacts. This principle prohibits use of men, material and
technology in ways that result in harm to our consumers,
employees and the general public.
Model Code of Conduct – Other Elements
• Be honest and trustworthy:
• Honesty is an essential component of trust. Without trust an
organization cannot function effectively. All of us are
expected not to make deliberately false or deceptive claims
about our products/ systems, but instead provide full
disclosure of all pertinent limitations and problems.
• Be fair and take action not to discriminate:
• The values of equality, tolerance, respect for others, and
the principles of equal justice govern this imperative.
Discrimination on the basis of race, sex, religion, age,
disability, national origin, or other such factors is an explicit
violation of this code.
Model Code of Conduct – Other Elements
• Practice integrity in our inter-personal relationships:
• In our relationships with colleagues, we should treat them with
respect and in good faith; in the same way we ourselves would
expect them to treat us. The principle to be adopted to guard
against loose talk or in its worst form-character assassination- is
not to say anything behind one’s back and never utter something,
which cannot be put in writing.
• Honor confidentiality:
• The principle of honesty extends to issues of confidentiality of
information. The ethical concern is to respect all obligations of
confidentiality to all stakeholders unless discharged from such
obligations by requirements of the law or other principles of this
code. We, therefore, will maintain the confidentiality of all material
non- public information about ABC Limited’s business and affairs.
Model Code of Conduct – Other Elements
• Practice integrity in our inter-personal relationships:
• In our relationships with colleagues, we should treat them with
respect and in good faith; in the same way we ourselves would
expect them to treat us. The principle to be adopted to guard
against loose talk or in its worst form-character assassination- is
not to say anything behind one’s back and never utter something,
which cannot be put in writing.
• Honor confidentiality:
• The principle of honesty extends to issues of confidentiality of
information. The ethical concern is to respect all obligations of
confidentiality to all stakeholders unless discharged from such
obligations by requirements of the law or other principles of this
code. We, therefore, will maintain the confidentiality of all material
non- public information about ABC Limited’s business and affairs.
THANK YOU