The Responsibility of Chartered Accountants in Upholding Business Ethics

Introduction

Businesses are merely not instruments of wealth creation but are important building blocks of the socio-economic system. They harness the collective synergy of different stakeholders - customers, suppliers, employees, lenders, shareholders, the society, the government, and the environment to create value. Here, treating every stakeholder as an equal partner is important. The business landscape abounds with opportunities but also with risks, creating pressure to perform. Greed and fear may cause businesses to lose sight of what is right and what is not, and succumb to unethical means of making profits or staying afloat.

Unethical practices result in huge losses for stakeholders as well as dent the trust reposed in businesses. Scam after scam has led regulators worldwide to focus on business conduct. Concepts like triple bottom line (people, planet and profits) and ESG (Environment, Social and Governance) are emphasized in various forums. This, together with the rise of responsible investing, is serving as a wakeup call for businesses.

What are ethics and how to identify an unethical practice?

The term \'Ethics\' can be described as doing the right thing given a set of circumstances. An ethical practice is one that promotes the welfare of the stakeholders while minimizing any harm to them. We need not search far when it comes to defining ethics, when \'Dharma\' is entrenched in Indian ethos. The principle of \'Dharma\' requires one to not just consider the written laws but seek to understand one\'s duty and perform the right action in a given situation. Ethics goes beyond mere compliance with law.

As a corollary, all unethical practices are not classified as offences in law. An \'offence\' is any act made punishable by law. While all offences are typically unethical, all unethical practices are not offences punishable under the law. Sometimes, an unethical practice does not get tainted with illegality or even with technical non-compliance. Some actions may be unethical but perfectly legal.

Unethical Practices in Finance and Accounting

Unethical practices in finance and accounting range from minor accounting \"adjustments\" to major frauds resulting in losses running to thousands of crores to investors or lenders. These include financial misreporting by inflating revenue to boost market perception or suppressing revenue to avoid taxes, or inflating or suppressing expenses, siphoning off money through fake transactions and forged documents, creating ghost employees, collusion with third parties, and so on. Tax evasion and money laundering often accompany financial frauds.

• Measures towards inflating or suppressing profits: These include inflating revenue by showing non-existent sales, recognizing sales on sale-or-return basis before meeting recognition criteria, classifying revenue expenditure as capital expenditure, suppressing profits by showing bogus expenses or inflating expenses etc.
• Judgments and estimates and other grey areas: While estimates and judgments form a necessary component of preparation of financial statements, these are areas where unethical practices could slide in subtly.
• Unjust enrichment at the cost of investors or lenders: Siphoning off public money to unjustly enrich promoters is seen in many instances.
• Tax evasion and tax avoidance: Suppressing profits is mostly aimed at avoiding taxes. Base erosion and profit shifting (BEPS) practices involve eroding the profit base in high-tax jurisdictions and shifting profits to low-tax jurisdictions.
• Money laundering: Money from illegal activities or untaxed income is removed as far from the source as possible to hoodwink authorities through placement, layering, and integration.
• Collusion: Frauds and unethical practices often involve corruption and collusion on some level.
• Insider trading: Communicating unpublished price sensitive information to others or trading while in possession of such information constitutes insider trading.

Broader implications of ethical lapses

Ethical lapses could have huge after-effects for the business, its promoters, stakeholders, and society. Loss of goodwill, monetary losses (penalties, damages, fines), loss of business opportunities, and potential prosecution/imprisonment are among the severe repercussions for businesses. For stakeholders and society, financial misconduct leads to huge investor/lender losses, employee credibility dents, and widespread societal harm in cases of environmental negligence or public health violations.

Ways in which Chartered Accountants may promote ethics

The society looks up to Chartered Accountants not only as experts in accounting, tax, and audit domains, but also as guardians of trust. Ways in which CAs can inspire ethical conduct include:

• Accepting clients and assignments based on integrity of the clients: Auditors must consider client integrity as a primary factor before acceptance (SQC 1).
• Ensuring independence: Upholding independence both in appearance and in mind beyond written regulations (Section 141 of Companies Act, 2013 and ICAI Code of Ethics).
• Performing robust audit procedures and exercising objectivity: Exercising professional skepticism and due diligence in evaluating audit evidence and organizational governance.
• Reporting of frauds: Fulfilling the mandatory duty to report frauds under Section 143(12) of the Companies Act, 2013.
• Responding to NOCLAR: Adhering to Non-Compliance with Laws and Regulations (NOCLAR) provisions under the ICAI Code of Ethics (Sections 260 and 360).
• Appropriate Audit Reporting: Issuing modified audit reports (SA 705) or Emphasis of Matter paragraphs (SA 706) where material misstatements or fundamental uncertainties exist.
• Interdisciplinary acumen: Acquiring interdisciplinary skillsets to detect subtle red flags and fraud risk factors (SA 240).
• Continuous professional development: Staying updated on evolving fraud forms, technologies, and Artificial Intelligence (AI) abuse.
• Ethical leadership: Setting an example of ethical conduct and uncompromising integrity.
• Codes, Policies, Procedures and Internal Controls: Helping businesses incorporate ethical frameworks into operating procedures and internal controls.
• Technology in ethics: Leveraging technologies like AI and blockchain to detect patterns and red flags promptly.

Role of ICAI in promoting ethics

ICAI undertakes continuous efforts to guide members through the Ethical Standards Board, the Code of Ethics (converged with IESBA standards), curriculum integration, specialized workshops, and guidance on non-audit services under Section 144 of the Companies Act, 2013.

Conclusion

Ethics is to business what an engine is to a train—it drives the entirety of business toward a sustainable future. Chartered Accountants, as the unsung heroes of stakeholders, ensure that businesses operate responsibly, paving the way for a sustainable economy and a fairer society.