CA Profession and Professional Standards
“The profession of chartered accountancy is based on code of professionalism and ethics. Often termed as a partner in the process of national development, the Institute of Chartered Accountants of India has been playing a crucial role in Indian economy by successful implementation of various financial and accounting standards. Running on the basis of professional ethics, ICAI is responsible for drafting accounting, auditing and other standards. Considering the amount of challenges in this area, it is advisable that Chartered Accountants must adhere to quality consciousness and professional standards in order to sustain the confidence of all the stakeholders. Read on…”
1 Evolution of the CA Profession and Professionalism
A ‘Profession’ is a disciplined group of professionals who adhere to professional standards and who hold themselves out as and are accepted by stakeholders to repose the confidence for possessing special knowledge and skills for.
‘Professionals’ are governed by codes of ethics and professional commitment to competence, integrity, morality, altruism and promotion of the public good within their expert domain and are quality conscious. ‘Professionalism’ is defined as the personally held beliefs of a professional about their own conduct as a member of a profession.
The CA profession can be traced all the way back to pre-independence times. The Companies Act, passed by the British administration in India in 1913, required a list of books that a company incorporated under the Act had to maintain. The Act also provided for the appointment of an auditor, who had the power to audit these books. Later, the Government introduced a Diploma in Accountancy course in Bombay (now Mumbai). This course followed a pattern similar to a smaller version of today’s CA course with a three-year training period. Those who completed the course and training could practice as an auditor in India. In 1930, the then Government decided to maintain a ‘Register of Accountants’ and preferred the title as ‘Registered Accountant’. However, even with all these practices, the accountancy profession remained under-regulated until the formation of an expert committee in 1948, which suggested that an autonomous body should be formed for enhanced regulation. By then, many Indians had already become members of the Institute of Chartered Accountants in England and Wales (ICAEW) and were known as Chartered Accountants at that time.
An ‘Expert Committee’ was formed in independent India to advocate the formation of an autonomous institution of accountants to govern the accountancy profession. In 1949, soon before India became Republic, the Parliament accepted the Expert Committee’s report and passed “The Chartered Accountants Act”. This Act came into effect from July 1, 1949 and the Institute of Chartered Accountants of India (ICAI) was established as the regulator of the esteemed profession.
Since then, July 1 has been commemorated as the CA Day in India. The term “Chartered Accountant” became the preferred title instead of the previously used “Registered Accountant”. However, unlike in other Commonwealth countries, the word ‘Chartered’ when used for Indian Accountants, has no relation to the royal charter of the British (as India is a republic)!
The traditional role of a Chartered Accountant as an accountant and auditor has undergone sea changes since 1949 as in today’s commercial world, he/she is recognised as ‘Business Solution Provider’.
The Expanding Spectrum of the Chartered Accountant
Hon’ble Prime Minister of India, Shri Narendra Modi while addressing during CA day on July 1, 2017 stated that: “Chartered Accountants are like Ambassadors of any country’s economic system. Your signature is more powerful than that of a Prime Minister. Your signature is a testimony to the trust in the truth.”
2 ICAI – Partner in Nation Building and Code of Ethics
The ICAI is often termed as a “partner in nation building” as it has played and continues to play a vital role in the Indian economy by successful implementation of various financial reporting standards viz. formulation of accounting standards, convergence with International Financial Reporting Standards (IFRS), implementation of auditing and assurance standards, and so on. The list is endless.
ICAI has achieved recognition as a premier accounting body not only in the country but also globally. At a macro level, the ICAI prescribes accounting/financial reporting standards, thus ensuring uniformity in the accounting and financial reporting and helping the stakeholders to assimilate how the financial performance, financial position and cash flow is displayed on historical facts. ICAI, as a regulator, works closely with the Ministry of Corporate affairs and while executing its leadership responsibilities, has intensified its interactions with the Ministry of Finance, Ministry of Human Resource Development, Reserve Bank of India, Ministry of Commerce, Ministry of Railway, Securities and Exchange Board of India and Insurance Regulatory and Development Authority besides a host of other number of government departments.
Code of Ethics: Foundation of Professionalism
“Ethics is knowing the difference between what you have a right to do and what is right to do.”
In today’s ever-changing commercial environment, ethics is not a domain that must be kept distinct from the practical world, but rather is an integral part of it. It must be imparted in the individual’s habits and temperament in order to create an overall culture of ethics. This force must be dominant enough to keep pace with the changing dynamics and quality consciousness of the profession. As a result, it was felt necessary for ICAI to frame ethical framework for Chartered Accountants. The provisions of the Code of Ethics has to be followed by all the members of the Institute, whether in practise or in service. The latest Code has been derived from the International Ethics Standards Board for Accountants (IESBA) as Code of Ethics, 2018 issued by the International Federation of Accountants (IFAC) subject to the required changes that have been made to make it compatible with Indian laws.
The Code of Ethics establishes fundamental ethical principles for professional accountants, reflecting the profession’s recognition of its public interest responsibility. These principles define the expected conduct of a professional accountant:
Importance of Code of Ethics:
- The Code of Ethics serves as a guide for members of the profession.
- A unique mark of a profession is acceptance of its accountability to the stakeholders. A professional accountant’s responsibility is not limited to meeting the needs of a single client or employer. Professional accountants are trusted by investors, banks, financial institutions, insurers, the government, tax authorities, collaborators, the business and financial community, and other stakeholders.
- Ethics are vital to encourage Chartered Accountants to maintain rightful professional demeanour. The approach and conduct of professional accountants in providing services have a bearing on the economic well-being of their profession and country.
- The ethical aspects of carrying profession are becoming just as imperative as the financial ones, and a well-considered code of ethics is an indispensable prerequisite for qualitative output.
3 I. Accounting Standards (AS) and Indian Accounting Standards (Ind AS)
In the present era of liberalisation and globalisation, the world has become a global village. Financial reporting plays a very important role in the economic growth of any country. It is a business communication language in which summarised business transactions are reported to the primary and secondary users in the form of ‘General Purpose Financial Statements’. With improving technology and logistics, businesses have the opportunities to expand at an international level. However, different accounting frameworks are observed in different countries for the same transaction. This results in confusion in the minds of the users of financial statements which has resulted in the need to adopting unified international standards that can help economy, industry and accounting professionals.
The Accounting Standards Board (ASB) of the ICAI established in the year 1977 issues the accounting standards to establish uniform standards for preparation of financial statements in accordance with the Indian GAAP, for better understanding of the users. These accounting standards are expected to be implemented by non-corporate entities including small and medium sized enterprises (SMEs). The auditors must ensure compliance of the accounting standards while certifying general purpose financial statements. Otherwise audit report needs qualification.
ICAI prepares and recommends AS/Ind AS through National Financial Reporting Authority (NFRA), which subsequently gets notified by MCA vide Companies (Accounting Standards) Rules, 2006, Companies (Indian Accounting Standards) Rules, 2015 and related amendments thereto, which are applicable to companies.
Ind AS Phased Implementation Roadmap
India decided to converge with IFRS for public interest entities and accordingly, IFRS-converged Indian Accounting Standards (Ind AS) were introduced. The Indian Government issued a roadmap for the implementation of Ind AS in a phased manner:
- Voluntary Phase: Under phase I, all companies are permitted to follow Ind AS on voluntary basis for the accounting period beginning on or after April 1, 2015.
- Phase I (Mandatory): All domestic public companies (Listed or Non-Listed) having a net worth of INR 500 crore or more are required to follow Ind AS on mandatory basis for the accounting period beginning on or after April 1, 2016.
- Phase II (Mandatory): Remaining listed companies (irrespective of net worth) and non-listed companies having net worth of INR 250 crore or more are required to follow Ind AS for the accounting period beginning on or after April 1, 2017.
- Group Entities: Besides, all holding, subsidiary, joint venture or associate companies of companies which are covered by the roadmap are also required to follow Ind AS in all phases.
- NBFCs, Banks & Insurance: In the similar fashion, the roadmap has also been made applicable for the Non-Banking Finance Companies (NBFCs) by now. However, for banks and insurance companies, Ind AS framework will be applicable from a future date as may be decided by the regulator.
The IFRS are principle-based standards issued by the International Accounting Standards Board (IASB) of IFRS Foundation that set common rules so that the financial statements can be consistent, transparent, and comparable globally. The ASB of the ICAI has been a critical wheel in the accounting standard-setting chariot of this nation since its formation, successfully implementing IFRS-converged Ind AS with few essential carve-outs with reference to national laws and practices.
Opportunities in Implementation of Ind AS in India
- Opportunities to the Accounting Profession: Though the initial phase of implementation was challenging, it provided many opportunities to practising professionals and non-practising members. In this huge transition, CAs have a significant role to guide and hand-hold entities for smooth transition requiring complete overhaul of policies, processes, operating structures, and IT systems. CAs can demonstrate talent across the globe as these standards are adopted in over 140 countries, exploring accounting, advisory, and training services.
- Opportunities to the Industry: The adoption of a single set of high quality globally accepted accounting standards helped reduce the cost of preparing financial statements, streamlined group consolidation, and enhanced stakeholder confidence.
- Opportunities to the Economy: Convergence with IFRS has helped industrial growth, benefitted corporate entities manifold, and boosted international comparability across industrial and capital markets.
- Opportunities to the Investors: Increased investor confidence, enhanced transparency, and improved comparability across global markets.
Ind AS Implementation Challenges
- First Time Adoption: Overhauling old accounting policies and adopting new IFRS principles.
- Issues in Reclassification and Regrouping: Separate disclosure of reclassifications requiring deep professional expertise.
- Management Training & Transition Plans: Overcoming knowledge deficits via ICAI Certificate Courses on IFRS/Ind AS.
- Effective Transition Audit: Elevated audit risk, reconfiguration of systems, and internal controls testing.
- Audit Risk: Vigilance against management misrepresentations, manipulations, or tampering of opening balances.
- Fair Value Measurement Base: Volatility and subjectivity arising from transitioning from Historical Cost to Fair Value accounting.
- Dual Accounting Frameworks: Parallel existence of rule-based AS and principle-based Ind AS; ASB is developing simplified Ind AS-conformed standards for SMEs.
- Change in IT Systems: Re-engineering ERPs to capture fair values, related party transactions, and segmental data.
4 II. Engagement and Quality Control Standards
The information provided by the management in financial statements is of utmost importance to investors, bankers and other stakeholders. Hence, it is important that the entity’s annual report provide qualitative information. Auditor plays a very important role in ensuring that the financial statements are acceptable worldwide. Taking these points into consideration, the ICAI has formulated Engagement and Quality Control Standards.
The Companies Act of 2013 (erstwhile 1956) state that auditing standards issued by the ICAI are mandatory for the audit of financial statements of companies in India. Standards of the following nature issued by the Auditing and Assurance Standards Board (AASB) shall be collectively known as ‘the Engagement Standards’:
| Standard Category | Mandate & Applicability |
|---|---|
| Standards on Quality Control (SQC) | SQC are applicable to the auditing firms which performs audits and reviews of historical financial information and other assurance and related services engagements. |
| Standards on Auditing (SAs) | SAs are to be applied in the audit of historical financial information. |
| Standards on Review Engagements (SREs) | SREs are to be applied in the review of historical financial information. |
| Standards on Assurance Engagements (SAEs) | SAEs are to be applied in assurance engagements, dealing with subject matters other than historical financial information. |
| Standards on Related Services (SRSs) | SRSs are to be applied to engagements involving application of agreed upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. |
Opportunities and Benefits of Engagement Standards
- Guidance to Auditors: Benchmark yardstick to determine the nature, timing, and extent of audit procedures.
- Enhance Quality and Relevance: Enables auditors to obtain reasonable assurance that statements are free from material misstatements and reflect true and fair view.
- Standardised Audit Practices: Uniformity in audit execution across diverse industries.
- Improved Credibility: Bolsters stakeholder and regulator confidence in audited accounts.
- Detect and Prevent Fraud: Proactive identification of systemic weaknesses, fulfilling watchdog responsibilities.
Challenges in Auditing Engagements
- Documentation Burden: Tracking queries and extensive audit trails can cause delays.
- Strict Deadlines: Tight statutory reporting windows for listed companies.
- COVID-19 Operational Constraints: Travel restrictions and remote auditing limitations.
5 III. Valuation Standards and Registered Valuers Organisations (RVOs)
With the commencement of the concept of registered valuers under the Companies Act, 2013 and with the notification of Companies (Registered Valuers and Valuation) Rules, 2017 and amendments thereto, the requirements place a tremendous responsibility on the members of profession in carrying out the valuation. The Government has reposed confidence in CAs to furnish the valuation report. Further, acknowledging the necessity to have consistent, uniform and transparent valuation policies and synchronise varied practices followed by the members undertaking the valuation assignments, ICAI issued Valuation Standards.
The ICAI has also formed Registered Valuers Organisation (ICAI RVO), which is a Section 8 Company, to enrol and regulate registered valuers as its members in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017.
Applicability of ICAI Valuation Standards 2018
- Mandatory for all valuation engagements undertaken by members of ICAI RVO under the Companies Act, 2013.
- Recommendatory for valuation engagements under other statutes such as Income Tax Act, SEBI, FEMA, etc., for members of the Institute.
- Effective for valuation reports issued on or after 1st July, 2018.
Statutory Mandate for RV Reports under Companies Act, 2013
- Issue of new shares to shareholders except in case of rights issue.
- Merger, amalgamation or restructuring requiring valuation of assets/shares or swap ratio calculation.
- Acquisition of minority shareholding by existing shareholders holding over 90% of equity.
- Allotment of shares for consideration other than cash and issue of sweat equity.
- Buy-back of shares from some or all shareholders.
- Liquidation of a company under the Insolvency and Bankruptcy Code (IBC), 2016.
Valuation Challenges
- Subjectivity: Inferences depend on individual professional judgement; there is no undisputed single value.
- Reliance on Management Representations: Potential exposure to losses from management misrepresentations or fraud.
- Quantifying Intangibles & Qualitative Factors: Difficulty in valuing non-tangible elements in business transactions.
- Market Volatility during Crises: Extreme fluctuations during disruptions such as COVID-19.
6 IV. Forensic Accounting and Investigation Standards (FAIS)
Business ecosystem has become increasingly complex due to rise in white collar crimes, frauds and scams observed recently in public as well as private sectors. Recognising the pressing necessity for proactive action in this area, ICAI has developed a full set of Forensic Accounting and Investigations Standards (FAIS) for its forensic professionals. The FAIS establish uniform performance and evaluation criteria, methods, processes, and practices. These standards are pronouncements, which form the foundation for conducting all forensic accounting and investigation engagements.
Further, the Council of the ICAI, recognizing the need for forensic accounting and fraud detection, in the emerging economic scenario, has also launched “Certificate Course on Forensic Accounting and Fraud Detection”.
Basic Principles Governing FAIS:
Note: FAIS are principle-based standards where the spirit of law prevails over the letter of law, setting mandatory minimum requirements for ICAI members.
Opportunities and Challenges in Forensic Accounting
Key Avenues: Anti-money laundering, tax fraud detection, dispute advisory, M&A due diligence, public sector bank forensic audits, insurance damage quantification, and cyber fraud detection.
Challenges: Acute talent shortage of expert forensic accountants, jurisdictional barriers in tracking cross-border FDI fraudsters, and court delays during pandemic disruptions.
7 V. Accounting Standards for Local Bodies (ASLBs) and Other Standards
The Local Bodies play a very important role in the planning and development of local areas that include villages, towns and/ or cities. Local Bodies play a role of an agent to implement various government schemes to the local people contributing to the economic development of any country. The AS and Ind AS are not applicable and do not govern the financial statements for Local Bodies. The ICAI formed a Committee on Accounting Standards for Local Bodies (CASLB) with the primary objective of formulating accounting standards that would be made applicable for the Local Bodies.
While formulating the Accounting Standards for Local Bodies (ASLBs), CASLB gives due consideration to the International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board (IPSASB) of IFAC and has integrated them, to the extent possible, in the light of the conditions and practices prevailing in India. Currently, most local bodies follow cash basis accounting; transition to accrual accounting remains an ongoing national priority.
Other Standards in the Professional Ecosystem
- Internal Audit Standards: Vital for strengthening internal checks and controls of corporate entities.
- Income Computation and Disclosure Standards (ICDS): Mandated by the Ministry of Finance for direct tax compliance.
- Sustainability Reporting Standards: Emerging framework developed by ICAI to report vital environmental and ESG metrics.
Global Standard-Setting Forums & AOSSG
At an international level, to help jurisdictions adopting or converging with IFRS, many international groups and forums have been formed to exchange ideas and present a unified voice:
- Asian-Oceanian Standard-Setters Group (AOSSG): A forum of 27 member jurisdictions across the Asia-Oceania region to share convergence experiences and shape global standards.
- World Standard-Setters (WSS) & IFASS: High-level international forums contributing to IASB and global financial reporting harmonization.
8 Conclusion
There are challenges in every profession and we CAs must ensure adherence to quality consciousness and professional standards in order to sustain the confidence of all the stakeholders, who rely on certified financial statements.
Hon’ble Prime Minister of India, Shri Narendra Modi had said: “We know that we will be more successful when we pursue our goals in partnership with the world.”