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
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, if he:
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
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
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 Institute;
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 business;
"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 means;
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
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
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
1. The entry should appear in the section/category of "Cost
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 other entries.
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 is published.
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
(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; and
(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
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
(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 advertisement.
(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
(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
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
office Direct Res.
Area of Experience (to
only on specific “pull”
(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
(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
(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
(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,
(15) The Website should ensure adequate secrecy of the matters of the
clients handled through Website.
(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 to 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
(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
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(
A member must not use the designation such as 'Member of Parliament',
'Municipal Councilor' nor any other functionary in addition to that of
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' simultaneously.
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
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
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
(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
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 published.
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
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 writing;
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 appointment.
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
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 misconduct.
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
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
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
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
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
(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
,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 (I-B).
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
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 General Meeting.
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
(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
(iii) Government Company, Central Government or any State Government.
(iv) A nationalised Bank or an Insurance Company carrying on general
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 224(3).
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
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 considered.
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 Act.
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
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
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 casual vacancy.
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
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
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
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
(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
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
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
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
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, if he-
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 auditor'.
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 disclosure.
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
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
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
Clause(7) : is grossly negligent in the conduct of his professional
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
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 made thereunder;
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