Acts or omissions which comprise professional misconduct within the meaning of Section
22 of the Cost and Works Accountants Act are defined in two Schedules viz the First
Schedule and the Second Schedule. The First Schedule is divided into three parts.
Part I of the First Schedule deals with the misconduct of a member in practice which
would have the effect generally of compromising his position as an independent person.
Part II deals with misconduct of members in service and Part III deals with the
misconduct of members generally. The Second Schedule is divided into two parts.
Part I deals with misconduct in relation to a member in practice and Part II deals
with misconduct of members generally. The implications of the different clauses
in the Schedules are discussed below:
THE FIRST SCHEDULE
If a member is found guilty of any of the acts or omissions stated in any of the
parts of this Schedule, the Council shall pass appropriate orders except in a case
in which the name of the member ought, in the view of the Council, to be removed
from the Register for a period exceeding five years or permanently.
Professional misconduct in relation to Cost Accountants in practice
Cost Accountant in practice shall be deemed to be guilty of professional misconduct,
Clause (1): allows any person to practice in his name as a Cost Accountant
unless such person is also a Cost Accountant in practice and is in partnership with
or employed by himself;
The above clause is intended to safeguard the public against unqualified accountants
practicing under the cover of qualified cost accountants. It ensures that the work
of the cost
accountant will be carried out by a Cost Accountant who may be his partner or his
employee and who would work under his control and supervision.
Clause (2): pays or allows or agrees to pay or allow, directly or indirectly,
any share, commission or brokerage in the fees or profits of his professional business,
to any person other than a member of the Institute or a partner or a retired partner
or the legal representative of a deceased partner;
Explanation: In this item "partner" includes a person residing
outside India with whom a Cost Accountant in practice has ,entered into partnership
which is not in contravention of item (4) of this part.
It is in order for a member to share his fees or profits with another member of
the Institute or a firm of Cost Accountants. However, it would not be permissible
for a member to share his fees or profits with a person who is not a member of the
Institute-say an Advocate or an Estate Agent. This rule is directed against arrangements
or understandings, whereby for a consideration, professional work will be introduced
to a member by a third party.
When there are two or more partners and one of them dies, the widow of the deceased
partner can continue to receive a share of the profit of the firm. A legal representative,
say widow of a deceased partner would be entitled to share the profits only where
the partnership agreement contains a provision that on the death of the partner
his widow or legal representative would be entitled to such payment by way of sharing
of fees or otherwise for some specified period. There could not be any sharing of
fees between the widow or the legal representative of the proprietor of a single
member firm and the purchaser of the goodwill of the firm on the death of the Sole
proprietor of the firm. Payment of goodwill to the widow is permissible in such
cases only for the goodwill of the firm and to enable such payments to be made in
instalments provided the agreement of the sale of goodwill contains such a provision.
These payments even if they are spread over the specified period should not be linked
up with participation in the earnings of the firm. The widow of a partner when the
partnership agreement does not contain a provision entitling her to share in profits,
would not be entitled to such profits.
Clause (3): accepts or agrees to accept any part of the profits of the professional
work of a lawyer, auctioneer, broker .or other agent who is not a member of the
Just as a member cannot share his fees with a non member, he is also not permitted
to receive and share the fees of others such as lawyers, engineers, brokers etc.
Such a restriction is necessary so that a Cost Accountant who is often required
to engage or to recommend for engagement by his clients, the services of the members
of other professions, such as, lawyers, engineers etc., may not share the fees received
by other professional persons.
Clause (4): enters into partnership with any person other than a Cost Accountant
in practice or a person resident without India who but for his residence abroad
would be entitled to be registered as a member under Clause (v) of sub-Section (1)
of Section 4 or whose qualifications are recognized by the Central Government or
the Council for the purpose of permitting such partnerships, provided that the Cost
Accountant shares in the fees or profits of the business of the partnership both
within and without India;
A Cost Accountant is not permitted to enter into-partnership with any person other
than a Cost Accountant in practice.
Clause (5): secures, either through the services of a person not qualified
to be his partner or by means which are not open to a Cost Accountant, any professional
"A man must stand erect, and not be kept erect by others" is a dictum
by Marcus Aurelius which though applicable for a man in every walk of life is more
so in the case of a professional. He must seek work not through any agency, but
by the respect that he is able to command for his professional talent and skill
and by the confidence he is able to inspire by his reputation. All forms of canvassing
on that account are regarded unethical and are prohibited.
Clause (6): solicits clients or professional work either directly or indirectly
by circular, advertisement, personal communication or interview or by any other
It is an elaboration of the principle propounded in the preceding clause enjoining
that for securing professional work the help of others should not be sought. This
clause further enjoins on a member not to solicit professional work by means of
advertisement, circular, personal communication or interview or by any other means.
The members should not adopt any indirect methods to advertise their professional
practice with a view to gain publicity and thereby solicit clients or professional
work. Such a restraint must be practiced so that members may maintain their independence
of judgement and may be able to command the respect of their prospective clients.
In the early years of their professional career, members may find this restraint
inconvenient and irksome. A question may arise in their minds as to how they would
be able to find professional work if they are not permitted to advertise or solicit
work. A little reflection would show that professional work cannot be secured either
by advertisement or by circulars or by solicitation. It can only be obtained by
a member gradually building confidence in his ability and integrity. The service
rendered by an accountant is of a personal and intimate nature and its value can
be appraised only by personal contact and experience. A public advertisement is
likely to lead to an impression that the professional person is over-anxious to
win confidence which however will have the opposite effect. The satisfaction of
clients would be the best advertisement which would lead to other clients. Unabashed
advertisement would affect the public esteem in which the profession is held and
would act to the disadvantage of its members. An advertisement is not a key to success
in the profession. It is the quality of service which attracts and retains the clients.
Some forms of soliciting work are discussed below
(a) Advertisement and Notes in the press
Members should not advertise for soliciting work or advertise in a manner which
could be interpreted as soliciting or offering to undertake professional work. They
are also not permitted to use the less open method of circulating letters to a small
field of possible clients. Personal canvassing or canvassing for clients of a previous
employer through the help of the employees are also not permitted.
The exceptions to the above rule are
(i) A member may advertise changes in partnerships or dissolution of a firm, or
of any change in the address of practice and telephone numbers. Such announcements
should be limited to a bare statement of facts and consideration given to the appropriateness
of the area of distribution of the newspaper or magazine and number of insertions.
(ii) A member is permitted to issue a classified advertisement in the Journal/Newsletter
of the Institute Intended to give information for sharing professional work on assignment
basis or for seeking professional work on partnership basis or salaried employment
in the field of accounting profession provided it only contains the accountant's
name, address, telephone, fax number and E-mail address.
(b) Application for empanelment for allotment of audit and other professional work.
The government departments, government companies/ corporations, courts, co-operative
societies and banks and other similar institutions prepare panels of Cost Accountants
for allotment of audit and other professional work. Where the existence of such
a panel is within the knowledge of a member, he is free to write to the concerned
organization with a request to place his name on the panel. However, it would not
be proper for the Cost Accountant to make roving enquiries by applying to any such
organization for having his name included in any such panel.
It is permissible to quote fees on enquiries being received from the above bodies
which maintain such panel. It is, however, not proper for the members to send printed
or cyclostyled copies of the scales of fees in reply to such enquiries.
Members are also advised that they should not respond to such empanelment in which
the payment of any registration or other fee or deposit is required.
An advertisement for any part-time work undertaken by practicing Cost Accountants,
would not be permissible because it would essentially be an offer of professional
services and therefore would offend the rule.
(c) Publication of Name or Firm Name by Cost Accountants in the Telephone or other
Directories published by Telephone Authorities or Private Bodies
It would not be proper for a Cost Accountant to have entries made in a Telephone
Directory either by making a special request or by means of an additional payment.
Such entries may be subject to the following restrictions:
1. The entry should appear in the section/category of "Cost Accountants".
2. The member/firm should belong to the town/city in respect of which the directory
is being published.
3. The entry should be in normal type of letters. Entry in bolder type or abnormal
type of letters or in a box is not permissible.
4. The order of the entries should be alphabetical and logical.
5. The entry should not appear in a manner giving the impression of publicity/advertisement.
Entry should not be given in a manner which gives prominence to it as compared to
6. The payment, if any, for the entry should not be unreasonable.
7. The entries should not be restricted and should be open to all the Cost Accountants/firms
of Cost Accountants in the particular city/town in respect whereof the directory
8. Subject to the above conditions, the members can also include their names in
trade directories which are published and/or otherwise available such as electronic
media e.g. internet, telephone services like "Ask Me Services" etc.
(d) Responding to Tenders, Advertisements and Circulars
Members should not:
(i) respond to advertisements inviting applications for appointment of auditors;
(ii) respond to tenders or circulars inviting quotations for professional services
restricted to Cost Accountants either by statute or in terms of tender or circular;
(iii) respond to an enquiry asking for quotation of fees in circumstances indicating
that such enquiry has been made to more than one members and as such the same partakes
the nature of a circular or tender.
While no relaxation may be given in the matter of responding to tenders in the audit
field which is exclusive to Cost Accountants, in other areas where members competed
with non-Cost Accountants, the restrictions be relaxed. Further, members are permitted
to respond to tenders even in the audit field outside the country if permitted under
the local laws provided the professional fees are received in foreign currency.
(e) Issuing Hand Bills
A member is prohibited from distributing hand bills ostensibly for the guidance
of persons other than his regular clients in matters such as changes in tax laws.
(f) Publication of Books or Articles
A member is not permitted to indicate in a book or an article, published by him,
the association with any firm of Cost Accountants.
(g) Issue of greeting cards or invitations
It is not proper to issue greeting cards or personal invitations by members indicating
their professional designation, status and qualifications etc. However, the designation
"Cost Accountant" as well as the name of the firm may be used in greeting
cards, invitations for marriages and religious ceremonies and any invitations for
opening or inauguration of office of the members, change in office premises and
change in telephone numbers, provided that such greeting cards or invitations etc.
are sent only to clients, relatives and friends of the members concerned.
(h) Soliciting professional work by making roving enquiries
It is not permissible for a member to address letters or circulars to persons who
are likely to require services of a Cost Accountant since it would tantamount to
(i) Seeking work from professional colleagues
The issue of an advertisement or a circular by a Cost Accountant, seeking work-from
professional colleagues on any basis whatsoever except as provided in (a) (ii) above
would be in violation of this Clause.
(k) Acceptance of original professional work by a member emanating from the client
introduced to him by another member
A member should not accept the original professional work emanating from a client
introduced to him by another member. If any professional work of such client comes
to him directly, it should be his duty to ask the client that he should come through
the other member dealing generally with his original work.
(I) Giving public interviews
While giving any interview or otherwise fumishing details about themselves or their
firms in public interviews or to the press or at any forum, the members should ensure
that, it should not result in publicity. Due care should be taken to ensure that
such interviews or details about the members or their firms are not given in a manner
highlighting their professional attainments.
(m) Members and/or firms who publish advertisements under Box numbers
Members/Firms are prohibited from inserting advertisements for soliciting clients
or professional work under box numbers in the newspapers. This practice is in violation
of this clause.
The council has approved the detailed guidelines for posting the particulars on
web site by Cost Accountants in practice and firm(s) of Cost Accountants in practice.
The guidelines are given below:
1. The Cost Accountants and / or Cost Accountants Firms would be free to create
their own Web site subject to the overall guidelines laid down by the Council hereunder.
The actual format of the Web site is not being prescribed nor any standard format
of the Web site is being given to provide independence to the Members. There is
no restriction on the colours which may be used in the Web site.
2. Individual Members would also be permitted to have their Web pages in their trade
name or individual name.
3. The Cost Accountants and / or Cost Accountants’ Firms would ensure that their
Web sites are run on a “pull” model and not a “push” model of the technology to
ensure that any person who wishes to locate the Cost Accountant or Cost Accountants’
firms would only have access to the information and the information should be provided
only on the basis of specific “pull” request.
4. The Cost Accountants and / or Cost Accountants’ Firms should ensure that none
of the information contained in the Web site be circulated on their own or through
E-mail or by any other mode or technique except on a specific “pull” request.
5. The Cost Accountants would also not issue any circular or any other advertisement
or any other material of any kind whatsoever by virtue of which they solicit people
to visit their Web site. The Cost Accountants would, however, be permitted to mention
their Web site address on their professional stationery.
6. The following information may be allowed to be displayed on the Firms / Members’
Web sites :
(i) Member / Trade / Firm name.
(ii) Year of establishment.
(iii) Member / Firms’ Address (both Head Office and Branches)
(iv) Nature of services rendered (to be displayable only on specific pull request)
office Direct Res. Mobile
Area of Experience (to Be displayable
only on specific “pull” request))
(vi) Details of Employees:-
Area of experience (to be displayable only on specific "pull” request)
(vii) Job vacancies for the Cost Accountant / firm of Cost Accountants
(viii) Nature of assignments handled (to be displayable only on specific “pull”
request) Names of clients and fee charged cannot be given.
(7) Since Cost Accountants in practice / Firms of Cost Accountants are not permitted
to use logo on the Web site.
(8) Display of Passport size photograph is permitted.
(9) The members may include articles, professional information, professional up
dation and other matters of larger importance or of professional interest.
(10) The bulletin boards can be provided.
(11) The chat rooms can be provided which permit chatting amongst members of the
ICWAI and between Firms and its clients. The confidentiality protocol would have
to be observed.
(12) The members / Firms can provide on line advice to their clients who specifically
request for the advice whether free of charge or on payment.
(13) The listing on suitable search engine should be permitted. However, the field
of search should be restricted only to the field of “Cost Accountants” or Indian
Cost Accountant” or any permutation or combination related thereto. The Websites
would be subjected to the Guidelines contained herein and normally would not be
vetted by the Institute of Cost & Works Accountants of India (ICWAI). ICWAI
at its sole discretion may vet any of the Websites created by its members or individual
Cost Accountant or Firms of Cost Accountants and would have powers to direct deletion
of certain portions and / or issue specific directions. In addition, necessary action
can be taken in accordance with the Cost Accountants Act, 1959 and the Regulations
framed thereunder in case there is any violation of the above guidelines.
(14) The details in the Website should be so designed that it does not amount to
soliciting client or professional work or advertisement of professional attainments
or services. In case any content or technical feature of Website is against the
professional Code of Conduct and Ethics as well as the restrictions contained in
the schedules to the Cost Accountants Act, 1959 or against the guidelines or directions
issued by ICWAI from time to time, appropriate action will be initiated by the ICWAI
in terms of its disciplinary mechanism either suo-motu or on complaint as provided
under the Cost Accountants Act, 1959.
(15) The Website should ensure adequate secrecy of the matters of the clients handled
(16) A number of Cost Accountants Societies or other bodies are creating data-bases
of Cost Accountants or Cost Accountants’ Firms and are offering listing to Cost
Accountants’. Such listing would be permitted with or without payment. In case a
Cost Accountant or Cost Accountants’ Firm is a member of a professional body or
association or Chamber of Commerce and they offer listing to the members or firm,
the same would be permitted.
(17) The Institute of Cost & Works Accountants of India will regularly inform
the aforesaid Guidelines to the members and the Cost Accountants’ Firms to ensure
the strict compliance of the Guidelines. The guidelines may be revised from time
(18) No Advertisement in the nature of banner or any other nature will be permitted
on the Website.
(19) The Website should be befitting the profession of Cost Accountants and should
not contain any information or material which is unbecoming of a cost accountant.
(20) The Website may provide a link to the Website of ICWAI, its Regional Councils
and Branches and also the Website of Govt. / Govt Departments / Regulatory authorities
/ other Professional Bodies, such as, CIMA.
(21) The address of the Website can be different from the name of the firm. But
it should not amount to soliciting clients or professional work or advertisement
of professional attainments or services. The Website address should be as near as
possible to the individual name / trade name, firm name of the Cost Accountant in
practice or firm of Cost Accountants in practice. The Committee on Ethical Standards
of ICWAI will decide in case there is any difficulty.
(22) The address of the Website should be intimated to the ICWAI within 30 days.
(23) The Website should mention the date up to which it is updated and the information
should not be at material variance from the information as per the ICWAI’s records.
A number of non-Cost Accountants’ firms, corporates including banks, finance companies
and newspapers have set up their own Websites providing advisory services on taxation
and other areas where Cost Accountants are rendering professional service. Some
of such Websites may request Cost Accountants or Cost Accountants’ firms to provide
consultation and advice through their Websites. This would be permitted subject
to the condition that on the Website, contact address of the Cost Accountant concerned
is not provided nor such Website will contain any material which advertises professional
achievements or status of such Cost Accountant except making a statement that they
are Cost Accountants.
Clause (7): advertises his professional attainments or services, or uses any designation
or expressions other than Cost Accountant on professional documents, visiting cards,
letter heads or sign boards, unless it be a degree of a University established by
law in India or recognised by the Central Government or a title indicating membership
of the Institute of Cost Accountants or of any other institution that has been recognised
by the Central Government or may be recognised by the Council;
This clause prohibits advertising of professional attainments or services of a member.
It also restrains a member from using any designation or expression other than that
of a Cost Accountant in documents through which the professional attainments of
the member would come to the notice of the public.
It is improper for a Cost Accountant to state on his professional documents that
he is an Income-tax Consultant, Chartered Accountant, Company Secretary, Cost Consultant
or a Management Consultant.
The date of setting up the practice by a member or the date of establishment of
the firm on the letterheads and other professional documents etc. should not be
mentioned. However in the Website, the year of establishment can be given on the
specific "pull" request( proposed).
A member must not use the designation such as 'Member of Parliament', 'Municipal
Councilor' nor any other functionary in addition to that of Cost Accountant.
Members of the Institute in practice who are otherwise eligible may practice as
advocates subject to the permission of the Bar Council but in such case, they should
not use designation 'Cost Accountant' in respect of the matters involving the practice
as an advocate. In respect of other matters they should use the designation 'Cost
Accountant' but they should not use the designation 'Cost Accountant' and 'advocate'
It is not proper for a Cost Accountant to use the designation "Cost Accountant"
except on professional documents, visiting cards, letter heads or sign boards and
under the circumstances clarified under para (g) of Clause (6).
The name, description and address of member (or firm) may appear in any directory
or list of members of a particular body in which the names are listed alphabetically.
For a specialized directory or a publication such as a "Who's Who" (including
those compiled on purely local basis), a member should use his discretion in supplying
information, bearing in mind the nature and purpose of the publications. In addition
to his name, description and address and those of his firm, a member may give where
appropriate, directorships held and reasonable personal details and may state his
outside interests. He should not, however, give the names of any of his clients
or details of the services offered by his firm.
Details in regard to publication of Name or Firm Name by Cost Accountants in the
Telephone or other Directories published by Telephone Authorities or Private Bodies
are published under Clause (6).
There should be no objection to the publication of photographs and brief particulars
of members in magazines provided no payment is made for such publication and there
is no advertisement of professional attainments.
A special exemption is made as regards publication of the name and address of a
member or that of his firm, with the description Cost Accountant(s), in an advertisement
appearing in the press in the following circumstances, provided that the advertisement
is not displayed more prominently than is usual for such advertisements or the name
of the member or that of his firm with the designation Cost Accountant(s) appears
in type not bolder than the substance of the advertisement:
(a) Advertisement for recruiting staff in' the members' own office.
(b) Advertisement inserted on behalf of clients requiring staff or wishing to acquire
or dispose of business or property.
(c) Advertisement for the sale of a business or property by a member acting in a
professional capacity as trustee, liquidator or receiver.
When advertising for staff, it is desirable that members should avoid the expression
such as "a well-known firm", since this would savoir of advertisement.
Similar' considerations apply to advertisements for cost trainees. The advertisements
should not contain any promotional element nor should there be any suggestion that
the services offered by the Cost Accountant or his firm are superior to those offered
by other accountants.
Notice in the press relating to the success in an examination of an individual candidate,
should not contain any element of undesirable publicity either in relation to the
cost trainee or an employee or the member or the firm with whom he was served.
It is usual for local papers to publish details of the examination success of local
candidates. Some biographical information is often included. The rule aforementioned
is not intended to discourage the printing of news of local interest but is intended
to indicate the need for restraint. The candidate's name and address, school and
local background, examination passed with details of any prize or place gained,
the name of the principal, firm and town in which the principal practises may be
The reports and certificates issued by a Cost Accountant bring him to the notice
of the public in a greater or lesser degree. It is therefore incumbent upon him
to ensure that the extent and manner of publication of certificates are limited
to what is necessary to enable the report or certificate to serve its proper purpose.
Members may appear on television and films and agree to broad - cast in the Radio
or give lectures at forums and may give their names and describe themselves as Cost
Accountants. Special qualifications or specialised knowledge directly relevant to
the subject matter of the programme may also be given. But no reference should be
made, in the case of practising member to the name and address or services of his
firm. What he may say or write must not be promotional of him or his firm but must
be an objective professional view of the topic under consideration.
Publicity is permitted for appointments to positions of local or national importance
or for the views of members on matters of similar importance. Mention of the membership
of the Institute is desirable in such cases. What should be aimed at is to achieve
suitable publicity for the Institute and its members generally. Members giving talks
or fectures or attending conference may describe themselves as Cost Accountants
only when they are acting in their capacity as Cost Accountants. Here again reference
to the professional firm of the member should not be given.
A Cost Accountant in practice holding training courses, seminars etc. for his staff
may also invite the staff of other Cost Accountants and clients to attend the same.
However, undue prominence should not be given to the name of the Cost Accountant
in any booklet or document issued in connection therewith.
Members 'writing articles or letters to the Press on subjects connected with the
profession may give their names and use the description 'Cost Accountants'.
With regard to the size of sign board for his office that a member can put up, it
is a matter in which the members should exercise their own discretion and good taste.
Use of glow signs or lights on large-sized boards as is used by traders or shop-keepers
would not be proper. A member can have a name board at the place of his residence
with the designation of a Cost Accountant, provided it is a name plate or name board
of an individual member and not of the firm.
Clause (8): accepts a position as auditor previously held by another Cost
Accountant or a restricted state auditor without first communicating with him in
It must be pointed out that professional courtesy alone is not the major reason
for requiring a member to communicate with the existing cost accountant who is a
member of the Institute or a certified auditor. The underlying objective is that
the member may have an opportunity to know the reasons for the change in order to
be able to safeguard his own interest, the legitimate interest of the public and
the independence of the existing accountant. It is not intended, in any way, to
prevent or obstruct the change. When making the enquiry from the retiring auditor,
the one proposed to be appointed or already appointed should primarily find out
whether there is any professional or other reasons why he should not accept the
It is important to remember that every client has an inherent right to choose his
accountant; also that he may, subject to compliance with the statutory requirements
in the case of limited companies, make a change whenever he chooses, whether or
not the reasons which had impelled him to do so are good and valid. The change normally
occurs where there has been a change of venue of business and a local accountant
is preferred or where the partner who has been dealing with the client's affairs
retires or dies; or where temperaments clash or the client has some good. reasons
to feel dissatisfied. In such cases, the retiring auditor should always accept the
situation with good grace.
The existence of a dispute as regards the fees may be root cause of an auditor being
changed. This would not constitute valid professional reasons on account of which
an audit should not be accepted by the member to whom it is offered. However, in
the case of an undisputed audit fees for carrying out the statutory audit under
the Companies Act, 1956 or various other statutes having not been paid, the incoming
auditor should not accept the appointment unless such fees are paid. In respect
of other dues, the incoming auditor should in appropriate circumstances use his
influence in favour of his predecessor have the dispute as regards the fees settled.
The professional reasons for not accepting an audit would be:
(i) Non-compliance of the provisions of Sections 224 and 225 of the Companies Act
as mentioned in Clause (9);
(ii) Undercutting of fees;
(iii) Non-payment of undisputed audit fees by auditees other than in case of sick
units for carrying out the statutory audit under the Companies Act, 1956 or various
other statutes; and
(iv) Issuance of a qualified report.
In the first three cases, an auditor who accepts the audit would be guilty of professional
What should be the correct procedure to adopt when a prospective client tells you
that he wants to change his auditor and wants you to take up his work? There being
two persons involved, the Company and the old auditor, the former should be asked
whether the retiring auditor had been informed of the intention to change. If the
answer is in the affirmative, then a communication should be addressed to the retiring
auditor. If, however, it is leamt that the old auditor has not been informed, and
the client is not willing to make the first move, it would be necessary to ask him
the reason for the proposed change. If there is no valid reason for a change, it
would be healthy practice not to accept the audit. If he decides to accept the audit
he should address a communication to the retiring auditor.
As stated earlier, the object of the incoming auditor, in communicating with the
retiring auditor is to ascertain from him whether there are any circumstances which
warrant him not to accept the appointment. For example, whether the previous auditor
has been changed on account of having qualified his report or he had expressed a
wish not to continue on account of something inherently wrong with the administration
of the business. The retiring auditor may even give out information regarding the
condition of the accounts of the client or the reason that impelled him to qualify
his report. In all these cases it would be essential for the incoming auditor to
carefully consider the facts before deciding whether or not he should accept the
audit, and should he do so, he must also take into account the information while
discharging his duties and responsibilities.
Sometimes, the retiring auditor fails without justifiable cause except a feeling
of hurt because of the change, to respond to the communication of the incoming auditor.
So that it may not create a deadlock, the auditor appointed can act, after waiting
for a reasonable time for a reply.
Mere posting of a letter "under certificate of posting" is not sufficient
to establish communication with the retiring auditor unless there is some evidence
to show that the letter has in fact reached the person communicated with. A Cost
Accountant who relies solely upon a letter posted "under certificate of posting"
therefore does so at his own risk.
Clause (9): accepts an appointment as auditor of a company without first
ascertaining from it whether the requirements of Section 225 of the Companies Act,
1956 in respect of such appointment have been duly complied with;
The Companies Act, 1956 provides for the requirements which an auditor appointed
in respect of a Company should satisfy himself about, before he accepts the appointment.
The relevant provisions are contained in Sections 224 and 225 of the said Act and
the Council has notified that the provisions to be complied with under Clause (9)
are those contained in Sections 224 and 225 of the Act. Section 224 contains several
provisions in the matter of appointment of auditors in different circumstances and
situations whereas Section 225 lays down the procedure which must be followed whenever
a company desires to change its auditors. In order that the validity of the appointment
of an auditor is not challenged or objected to by shareholders or the retiring auditors
at a later date, it has been made obligatory on the incoming auditor to ascertain
from the company that the appropriate procedure in the matter of appointment has
been faithfully followed. The following guidelines have been issued by the Council
for this purpose
1. Clause (9) of Part I of the First Schedule to Cost and Works Accountants Act,
1959, provides that a member in practice shall be deemed to be guilty of professional
misconduct if he accepts an appointment as auditor of a company without first ascertaining
from it whether the requirements of Sections 224 "and 225 of the Companies
Act, 1956, in respect of such appointment have been duly complied with. Under this
clause it is obligatory on the incoming auditor to ascertain from the company that
the appropriate procedure in the matter of his appointment has been duly complied
with so that no shareholder or retiring auditor may, at a later date, challenge
the validity of such appointment.
2. A question arises as to what is the duty of the incoming auditor under this clause
and what steps he should take in order to ascertain whether the company has complied
with the provisions of Sections 224 and 225 of the Companies Act. These guidelines
are issued by the Council in order to assist the members in practice to ensure that
the provisions of clause (9) are duly complied with.
3. It may be clarified that though clause (9) refers to compliance with Sections
224 and 225 of the Companies Act, it is also necessary to ascertain that the provisions
of Section 224A are duly complied with by the Company. This Section deals with special
provisions relating to appointment of auditors by certain companies and they have
necessarily to be considered by the incoming auditor before he accepts his assignment.
4. The steps to be taken by an auditor of a company who is appointed in the following
circumstances are indicated below:
(i) When the auditor appointed is the first auditor of the company.
(ii) When the auditor is appointed in place of an existing auditor who has resigned
or has been removed or has ceased to hold office for any other reason.
(iii) When the auditor or auditors appointed by the company were holding this office
jointly with others and one or more of such joint auditors are not re-appointed.
(iv) When one or more of the auditors appointed by the Company was/were not holding
this office earlier.
5. The procedure to be followed by a company for appointment of an auditor is laid
down in Section 224 of the Companies Act, 1956. The relevant provisions of the Section
are summarized in the ensuing sub-paras.
5.1 The first auditor can be appointed by the Board of Directors' within one month
of the date of registration of the Company. . The auditor so appointed will hold
office up to the conclusion' of the first Annual General Meeting. '
5.2 If the Board of Directors do not make such appointment, the company, can make
the appointment of first auditor at any General Meeting.
,5.3 The first auditor appointed by the Board of Directors can be removed at any
General Meeting and any other auditor can be appointed at such meeting if any member
gives due notice of such resolution and such notice, is sent to all the members
of the Company at least fourteen days before the date of the meeting. The notice
of such a resolution will have to be dealt with as provided in Sections 225(2) and
225(3). In this connection, the procedure discussed in paras 7.4 to 7.7 below will
have to be followed before any resolution for removal of the first auditor is passed
at the General Meeting. For the removal of the first auditor of a Company approval
of the Central Government as mentioned in para 5.14 below is not necessary.
5.4 Subsequent appointment of the auditor is to be made at each Annual General Meeting
of the Company.
5.5 Before making appointment or reappointment of an auditor, the company has to
obtain a written certificate from the auditor proposed to be appointed that such
appointment or reappointment will be in accordance with the limits in respect of
maximum number of audits which he can accept under the provisions of Section 224
5.6 The auditor so appointed will hold his office from the conclusion of the meeting
at which he is appointed to the conclusion of the next Annual General Meeting.
5.7 The Company has to give intimation of the appointment to the auditor within
seven days of his appointment.
5.8 If the retiring auditor has given a notice in writing of his unwillingness to
be reappointed, the Company can appoint any other auditor.
5.9 The members of the company can pass a resolution at the Annual General Meeting
to the effect that the retiring auditor shall not be reappointed. They can also
pass a resolution at that meeting to appoint some-one else in place of the retiring
auditor. Where a notice has been given of an intended resolution to appoint some
other auditor(s) in the place of a retiring auditor but such a resolution cannot
be proceeded with in view of the fact that the person or persons proposed to be
appointed has incurred an incapacity or disqualification or has died, the retiring
auditor shall not be re-appointed. For this purpose the procedure laid down in Section
225 is to be complied with.
5.10 Except in the circumstances mentioned in 5.8 and 5.9 above, a retiring auditor
shall be re-appointed if he is otherwise qualified for such reappointment.
5.11 If the company fails to appoint an auditor at the Annual General Meeting, such
appointment will be made by the Central Government. The company has to give intimation
to the Central Government within seven days about the fact that no such appointment
has been made.
5.12 The Board of Directors, except for the situation covered by 5.13 below, can
fill any casual vacancy in the office of the auditor. Until this appointment is
made the remaining auditor, in case there are joint auditors, can function as auditor
of the Company.
I5.13 If the casual vacancy is caused by the resignation of an auditor, such vacancy
can only be filled by the company in any General Meeting. The auditor appointed
to fill any casual vacancy shall hold office until the conclusion of the next Annual
5.14 The company can remove the auditor before the expiry of his term of office
by a resolution passed at any General Meeting and after obtaining previous approval
of the Central Government.
6. Section 224A of the Companies Act lays down the procedure for appointment of
auditor by a company in which 25% or more of the subscribed capital is held, whether
singly or in combination, by the following institutions:
(i) A public financial institution.
(ii) Any financial or other institution established under a State Act in which the
State Government holds 51 % or more of the subscribed share capital.
(iii) Government Company, Central Government or any State Government.
(iv) A nationalised Bank or an Insurance Company carrying on general insurance business.
The procedure to be followed by such a company, in brief, is as under:
6.1 The appointment or reappointment of auditor at each Annual General Meeting shall
be made by a special resolution.
6.2 If the company fails to make such appointment or reappointment of auditor, the
Central Government will have to make the appointment of auditor as provided in Section
6.3 The provisions relating to appointment of first auditor, filling of casual vacancy,
removal of auditor etc. which are contained in Section 224 will apply to the company
specified in Section 224A.
7. Section 225 of the Companies Act lays down the procedure for appointment of auditor
other"than the retiring auditor and for removal of existing auditor. The procedure
for giving special notice as contained in Section 225(1) does not apply to the removal
of the first auditor appointed by the Board of Directors, because separate provision
as stated in para 5.3 above is made for this purpose. The procedure to be followed
by the Company, is as under:
7.1 If a member of the company wants that the retiring auditor should not be reappointed
or that an auditor other than the retiring- auditor should be appointed, he has
to give a special notice to the company and specify the resolution which he proposes
to' move at the Annual General Meeting for this purpose.
7.2 Such special notice is required to be given if a member of the company wants
to remove the auditor before the expiry of his term of office.
7.3 The special notice should be given at least 14 days before the date of the General
Meeting when the question of appointment or reappointment of the auditor is to be
7.4 On receipt of the special notice of such a resolution, the company has to send
a copy of the same to the retiring auditor forthwith.
7.5 The company is also required to send the special notice to the members of the
Company at least seven days before the Meeting as per the provisions of Section
190(2) read with Sections 172(2) and 53(1) to 53(4) of the Companies Act. According
to these provisions, the notice should be sent by post or if that is not practicable
then it should be given either by advertisement in a newspaper having an appropriate
circulation or in any other mode allowed by the Articles of Association of the Company.
7.6 After receipt of the above notice, the retiring auditor can submit his representation
to the members of the Company. Such representation, on receipt by the company, is
required to be sent to its members as required under Section 225(3) of the Companies
7.7 The representation received from the retiring auditor will have to be considered
at the General Meeting of the company before the resolution proposed by the concerned
member is passed. The resolution proposed by the concerned member can be passed
only in accordance with the provisions of Section 189 of the Companies Act.
8. Under Clause (9) of Part I of the First Schedule to the Cost and Works Accountants
Act, 1959, the incoming auditor has to ascertain whether the company has complied
with the provisions of the above sections. The word "ascertain" means
"to find out for certain". This would mean that the incoming auditor should
find out for certain as to whether the Company has complied with the provisions
of Sections 224 and 233-B of the Companies Act. In this respect, it would not be
sufficient for the incoming auditor to accept a certificate from the management
of the Company that the provisions of the above sections have been complied with.
It is necessary for the incoming auditor to verify the relevant records of the Company
and ascertain as to whether the company has, in fact, complied with the provisions
of the above sections. If the company is not willing to allow the incoming auditor
to verify the relevant records in order to enable him to ascertain as to whether
the provisions of the above sections have been complied with, the incoming auditor
should not accept the audit assignment.
9. It is suggested that the incoming auditor should verify the following records
of the company
9.1 .If the appointment of the auditor is being made for the first time after incorporation
of the Company, the auditor should verify as to whether the Board of Directors have
passed the resolution for his appointment within one month of the date of registration
of the Company.
9.2 If the Board of Directors have not appointed the first auditor but the appointment
is being made by a general meeting of the company, the auditor should verify as
to whether a proper notice convening the general meeting has been issued by the
Company and whether the resolution has been validly passed at the general meeting
of the company.
9.3 If the appointment is being made to fill a casual vacancy, the incoming auditor
should verify as to whether the Board of Directors have powers to fill the casual
vacancy and whether the Board of Directors have passed the resolution filling the
9.4 If the vacancy has arisen due to resignation of the auditor, the incoming auditor
should see as to whether a proper resolution filling the vacancy has been passed
at the General Meeting of the Company.
9.5 If the vacancy has arisen as a result of removal of the auditor before the expiry
of his term of office, the incoming auditor should see that proper resolution has
been passed at the General Meeting of the company and that the previous approval
of the Central Government has been obtained by the company.
Clause (10): engages in any business or occupation other than the profession
of cost accountants unless permitted by the Council so to engage:
Provided that nothing contained herein shall disentitle, a cost accountant from
being a director of a company, unless he or any of his partners is interested in
such company as accountant;
This is a provision introduced to restrain a member in practice from engaging himself
in any business or occupation other than that of accountant except when permitted
by the Council to be so engaged. The objective is to restrain members from carrying
on any other business in conjunction with the profession of accountancy and combining
such work with any business which is not in keeping with the dignity of the profession.
Another reason for the introduction of such prohibition is that a cost accountant,
if permitted to enter into all kinds of business, would be able to advertise for
his other business and thereby secure an unfair advantage in his professional practice.
Clause-(11): accepts a position as cost accountant previously held by some
other cost accountant in practice in such conditions as to constitute undercutting.
Clause-(12): allows a person not being a member of the Institute in practice
or a member not being his partner to sign on his behalf or on behalf of his firm
any cost or pricing statements or any other statements relate thereto.
Professional Misconduct in Relation to Members of the Institute in Service
The three clauses reproduced below included in this part of the Schedule define
different types of conduct of a member who is not in practice but is an employee
of a firm, company, or person which would make him guilty of professional misconduct:
(1) If he pays or allows or agrees to pay directly or indirectly to any person any
share in the emoluments of the employment undertaken by the member;
(2) If he accepts or agrees to accept any part of fees, profits or gains from a
lawyer, a Chartered Accountant or broker engaged by such company, firm or person
or agent or customer of such company, firm or person by way of commission or gratification;
(3) If he discloses confidential information acquired in the course of his employment
except as and when required by law or except as permitted by the employer.
A member in the foregoing circumstances would be guilty of misconduct regardless
of the fact that he was in whole-time or part-time employment or that he was carrying
on practice of accountancy along with his employment.
These are simple rules of ethics; the first two have already been considered in
relation to a member in practice under clauses (2) & (3) of part I of the First
Schedule. The third clause is an adaptation of the well-accepted principle of the
law of agency.
PART - III
Professional Misconduct in Relation to Members of the Institute Generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty
of professional misconduct.
(1) If he includes in any statement, return or form to be submitted to the Council
any particulars knowing them to be false.
(2) If he, not being a fellow styles himself as a fellow.
(3) If he does not supply the information called for, or does not comply with the
requirements asked for, by the Councilor any of its Committees.
The foregoing clauses are intended to empower the Council to enforce discipline
over the members, and for obtaining information from members or requiring compliance
with any directions issued by the Council.
THE SECOND SCHEDULE
If a member is found guilty by the Council of any of the acts or omissions stated
in either of the Parts of this Schedule, its finding with recommendations are to
be referred to the High Court for decisions.
Professional misconduct in relation to Cost Accountants in practice requiring action
by a High Court:
A Cost Accountant in practice shall be deemed to be guilty of professional misconduct,
Clause (1): discloses information acquired in the course of his professional
engagement to any person other than his client, without the consent of his client
or otherwise than as required by any law for the time being in force;
An accountant, in public practice, has access to a great deal of information of
his client which is of a highly confidential character. It is important for the
work of an accountant and for maintaining the dignity and status of the profession
that he should treat such information as having been provided to him, only to facilitate
the performance of his professional duties for which his services have been engaged.
To divulge such information would be a breach of professional confidence which may
give rise to the most serious consequences, even to an action by the client for
the loss suffered by him through such a breach. But for this confidence that the
public has developed in the integrity of accountants, it would not be possible for
persons in a similar trade or industry to appoint the same accountant. The accountant's
duty not to disclose continues even after the completion of his assignment.
If disclosure is required as a part of performance of professional duty by a practicing
member in relation to a client, the fact that such performance is required by the
client would itself amount to the client consenting to such disclosure.
If disclosure is required in other cases, it would be necessary to ensure that the
consent of the client is given by a person who is competent to accord such consent.
Thus, in the case of a sole-proprietary concern, the consent may be given by the
proprietor or his constituted attorney who is legally empowered to give such consent.
In the case of a partnership firm, since in turn, every partner has the authority
to bind the firm by his acts, the consent may be given by any partner.
An auditor is not required to provide the client or the other auditors of the same
enterprise or its related enterprise such as a parent or a subsidiary, access to
his audit working papers. The main auditors of an enterprise do not have right of
access to the audit working papers of the branch auditors. In the case of a company,
the statutory auditor has to consider the report of the branch auditor and has a
right to seek clarifications and/or to visit the branch if he deems it necessary
to do so for the performance of the duties as auditor. An auditor can rely on the
work of another auditor, without having any right of access to the audit working
papers of the other auditor. For this purpose, the term 'auditor' includes 'internal
However, the auditor may, at his discretion, in cases considered appropriate by
him, make portions of or extracts from his working papers available to the client.
It is not possible to set out all the circumstances under which disclosure of information
may be required by law. If under any legal compulsion and if it is not legally permissible
to claim privilege under the Evidence Act, 1972 (S.126), the disclosure made by
a member of such information may not be considered as misconduct. However, such
matters involve niceties of law and expert legal advice may be sought prior to such
The only circumstances in which this duty of confidence may give rise to a difficulty
is where the accountant has reason to believe that the client has been guilty of
some unlawful act or default. This
Clause(2) : certifies or summits in his name or the name of his firm a report
of an examination of cost accounting and related statements unless the examination
of such statements has been made by him or by a partner or an employee in his firm
or by another cost accountant in practice;
Clause(3): permits his name or the name of his firm to be used in connection
with an estimate of cost or earnings contingent upon future transactions in a manner
which may lead to the belief that he vouches for the accuracy of the forecast.
Clause (4): expresses his opinion on financial statements of any business
or any enterprise in which he, his firm or a partner in his firm has a substantial
interest, unless he discloses the interest also in his report ;
If the opinion of auditors are to command respect and the confidence of the public,
it is essential that they must disclose every factor which is likely to affect their
independence. Since financial interest in the business can be one of the important
factors which may disturb independence, the clause provides that the existence of
such an interest direct or indirect should be disclosed. This is intended to assure
the public as regards the faith and confidences that could be reposed on the independent
opinion expressed by the auditors. .
The words "financial statements" used in this clause would cover both
reports and certificates usually given after an examination of the accounts or the
financial statement or any attest function under any statutory enactment or for
purposes of income-tax assessments. This would not however, apply to cases where
such statements are prepared by members in employment purely for the information
of their respective employers in the normal course of their duties and not meant
to be submitted to any outside authority.
Public conscience is expected to be ahead of the law. Members, therefore, are expected
to interpret the requirement as regards independence much more strictly than what
the law requires and should not place themselves in positions which would either
compromise or jeopardize their independence.
Clause(5): fails to disclose in a cost or pricing statement a material fact
known to him which is not disclosed in a cost or pricing statement but disclosure
of which is necessary to make such statement not misleading;
Clause(6): fails to report a material misstatement known to him to appear
in a cost or pricing statement with which he is concerned in a professional capacity;
Clause(7) : is grossly negligent in the conduct of his professional duties;
Clause (8): fails to obtain sufficient information to warrant the expression
of an opinion or makes exceptions which are sufficiently material to negate the
expression of an opinion;
Clause(9): fails to invite attention to any material departure from the generally
accepted procedure of costing and pricing applicable to the circumstances;
Clause(10): fails to keep moneys of his clients in a separate banking account
or to use such moneys purposes for which they are intended.
PART – II
Professional misconduct in relation to members of the Institute generally requiring
action by a High Court.
A member of the Institute whether in practice or not shall be deemed to be guilty
of professional misconduct if he –
Clause (1): contravenes any of the provisions of this Act or the regulations
Clause (2): is guilty of such other acts or omissions as may be specified
by the council in this behalf by notification in the Gazette of India.