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Code of Conduct for Organisations By; CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)]

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Presentation on theme: "Code of Conduct for Organisations By; CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)]"— Presentation transcript:

1 Code of Conduct for Organisations By; CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)]

2 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

3 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."

4 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

5 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

6 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.

7 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.

8 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)

9 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)

10 Code of Conduct imbibed under SEBI Act, 1992

11 Penalties under the SEBI Act Section 15A: 1.Failure to furnish any document, return or report to SEBI; 2.Failure to file any return or furnish any information, books or other documents to SEBI; 3.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

12 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

13 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

14 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 ;

15 Code of Ethics for ICAI Members

16 First Schedule: Part I

17 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

18 Clause 5 Misconduct Securing professional business through unauthorised means Open/ Authorised Means 1. Employee; 2. His Partner; 3. Other Means under Clause 6 & 7

19 Clause 6 Misconduct Solicitation of clients or professional work Solicitation can be direct or indirect through circular, advertisement, personal communication, interview, etc. Exceptions Work from other CA in practice Responding to tenders or enquiries

20 Clause 7 Misconduct Advertising attainments or services Using unapproved or wrong designations Exceptions Advertising through Write Up permitted

21 Clause 8 Misconduct If no written communication with previous auditor before accepting the position as an auditor Exceptions NIL

22 Clause 9 Misconduct If does not ascertain the compliance of Sec. 224 & 225 in respect of his appointment

23 Clause 10 Misconduct Fees on: (i) % of Profits; or (ii) Contingent Findings Exceptions under Reg Liquidator/ Receiver; 2. Audit of Cooperative Society; 3. D.T. Valuation

24 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

25 Clause 12 Misconduct Allowing non- members to F.S. Sec. 26 also states so Exceptions Signing documents not containing expression of opinion

26 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

27 First Schedule: Part I: Clause 2 Exceptions: 1.ICAI Member; 2.Partner; 3.Retired Partner; 4.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

28 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

29 First Schedule: Part I: Clause 3 Exceptions: 1.ICAI Member; 2.Member of other specified professional bodies; 3.Specified qualified persons

30 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

31 First Schedule: Part I: Clause 5 Professional Misconduct if: 1.Secures work from Non-members Exceptions: 1.Employee; 2.Partner; 3.Other open means (e.g. Clause 6 or 7); 4.Persons as per Clause 2, 3 and 4

32 Professional Bodies for Clause 2, 3 and 5 1.ICSI; 2.ICWAI; 3.Bar Council; 4.Indian Institute of Architects; 5.Institute of Actuaries

33 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)

34 Membership of Professional Bodies for Clause 4 1.ICSI; 2.ICWAI; 3.Advocate (i.e. member of Bar Council); 4.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)

35 First Schedule: Part II

36 Clause 1 Misconduct Paying/ allowing to any person share in employment emoluments

37 Clause 2 Misconduct Accepting any remuneration/ commission/ gratification from counsels/ customers of the company/ firm

38 First Schedule: Part III

39 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

40 Second Schedule: Part I

41 Clause 1 Misconduct Disclosure of information acquired during professional engagement Exceptions 1. Client’s consent; 2. Law Requirements Same principle also in SA 200

42 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

43 Clause 3 Misconduct Vouching the accuracy of forecasts Exceptions Follow AAS 35/ SAE 3400

44 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

45 Clause 8 Misconduct Fails to obtain information for expression of opinion In a way, its about violation of SA 500/ SA 501

46 Clause 9 Misconduct Failure to invite attention to any material departure to Generally Accepted Audit Procedure

47 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

48 Clauses Misconduct Clause 5 Failure to disclose “Material Fact” Clause 6 Failure to report “Material Misstatement”

49 Clause 7 Misconduct Grossly Negligent of his Duties (Vituperative Epithet)

50 Second Schedule: Part II

51 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

52

53 Central Council General Guidelines, 2008 (earlier referred as ICAI Notifications)

54 Books of Accounts Practicing CA/ Firm to maintain proper books including: 1.Cash book; 2.Ledger

55 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

56 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

57 Minimum Audit Fees (omitted w.e.f. June 7th 2011)

58 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

59 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

60 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

61 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

62 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.)

63 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

64 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

65 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

66 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 decision- making 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

67 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.

68 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.

69 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.

70 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.

71 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.

72 THANK YOU


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