1. Introduction
Schedule II to the Chartered Accountants Act, 1949 (the “Act”) sets out graver instances of professional and other misconduct and prescribes correspondingly higher sanctions. While Schedule I covers procedural lapses and lower-order breaches, Schedule II addresses situations going to the heart of public interest—truthful reporting, independence, diligence and fidelity to law. This article provides a clause-by-clause analysis of Schedule II as it stands post the 2022 amendments, anchored in statutory language, case law, and current practice developments such as UDIN, NOCLAR, NFRA oversight, and digital-first audits. Numerical illustrations and real-world examples are included to help practitioners in Jaipur and across India apply these standards consistently.
Schedule II is divided into three Parts: Part I (professional misconduct for members in practice), Part II (professional misconduct applicable to all members), and Part III (other misconduct). The analysis below explains the ambit, material elements, defences, practical controls, and recent technological overlays.
2. Structure of Schedule II (Quick Map)
Part I: Clauses (1)–(10) – core audit/attest ethics: confidentiality, proper examination, forecasts, independence, disclosure/reporting of material facts and misstatements, due diligence, sufficient appropriate evidence, GAAS compliance, and client monies.
Part II: Clauses (1)–(5) – compliance with the Act/Regulations/Guidelines, employment confidentiality, false particulars furnished to ICAI/NFRA/disciplinary bodies, defalcation, and Companies Act audit ineligibility.
Part III: ‘Other misconduct’ – conviction for offences punishable with imprisonment exceeding six months.
3. Part I — Professional Misconduct in Relation to Chartered Accountants in Practice (Clauses 1–10)
Clause (1): Unauthorized Disclosure of Client Information
Text in substance: Disclosing information acquired during a professional engagement without client consent or legal requirement constitutes misconduct.
Key terms:
“Information acquired in the course of professional engagement” – encompasses working papers, management representations, audit findings, tax computations, and correspondence.
“Consent” – explicit, preferably written; implied consent is risky and fact-specific.
“Required by law” – statutory or judicial mandate (e.g., court order, notices under the Income-tax Act, PMLA reporting).
Practice notes and controls:
Adopt a documented confidentiality policy; restrict sharing via role-based access in audit tools.
Use NDAs for experts and network firms; vet cloud providers for data residency and security.
Mark privileged/legal-advise communications distinctly and maintain separate access.
Illustration: During a statutory audit, the engagement team discovers a pending related-party transaction not disclosed in notes. A junior emails details to a friend in another firm for ‘informal advice’. This breaches Clause (1). A compliant alternative is to consult within the firm or use an approved expert under a confidentiality agreement.
Clause (2): Attaching One’s Name to Unexamined Financial Statements
Text in substance: Certifying or submitting a report of examination of financial statements in one’s name or firm’s name without having personally conducted (or ensured conduct by a partner/employee/another CA in practice) the necessary examination is misconduct.
Key terms:
“Examination” – audit, review or other assurance procedures consistent with SAs/SSAs/SAE/SRS.
“By him or his firm or another CA in practice” – permits component auditors under documented instructions and review.
Technology overlay: UDIN is mandatory for audit/assurance since 1 July 2019 and tax/GST audits since 1 April 2019. Absence or misuse of UDIN often surfaces Clause (2) breaches where signatures are affixed without work. Firms should implement pre-issuance UDIN checks in EQCR/workflow tools.
Clause (3): Association with Prospective Financial Information (Forecasts)
Text in substance: Permitting use of one’s name in connection with forecasts or estimates contingent on future transactions in a manner that suggests vouching for accuracy constitutes misconduct.
Key terms:
“Estimate of earnings contingent upon future transactions” – projections/forecasts, not historical assurance.
“Lead to belief that he vouches” – marketing decks implying ‘auditor-certified forecast’ are prohibited.
Illustration: A start-up circulates a pitch deck stating ‘Earnings forecast reviewed by ABC&Co., Chartered Accountants’. Unless the engagement is under an applicable assurance standard for prospective information with explicit limitation language, this invites Clause (3) exposure.
Clause (4): Independence – Substantial Interest in the Client
Text in substance: Expressing an opinion on financial statements where the member, firm or partner has a substantial interest is misconduct.
Key terms:
“Substantial interest” – evaluate material direct/indirect financial interest, significant influence through relatives/entities, loans/guarantees; align with Companies Act, 2013 and Code of Ethics independence framework.
“Expresses his opinion” – audit/review/certification; even advisory accompanying assurance can be implicated.
Controls: Independence declarations from partners/staff, automated equity monitoring, and client/engagement acceptance checks are essential. For banking audits (e.g., UCO Bank branches), ensure no partner/relative holds disqualifying interests in the auditee bank.
Clause (5): Failure to Disclose a Material Fact
Text in substance: Failure to disclose a material fact known to the member, necessary to make the financial statements not misleading, when concerned in a professional capacity, is misconduct.
Illustration (numerical):
A company capitalizes ₹8.00 crore as ‘development cost’. Audit testing reveals ₹2.20 crore relates to marketing spend. If materiality (say 5% of PBT; PBT = ₹20 crore ⇒ materiality ~₹1.0 crore) is breached and the auditor omits to require disclosure/adjustment or suitably modify the report, Clause (5) is attracted.
Clause (6): Failure to Report a Material Misstatement
Text in substance: Failure to report a material misstatement known to the member in financial statements with which he is concerned in a professional capacity constitutes misconduct.
Distinction from Clause (5): Clause (5) addresses omission of a material fact; Clause (6) targets known misstatements not reported. Control: Robust documentation (SA 230) and clear basis for modified opinions (SA 705) or Emphasis of Matter (SA 706) help demonstrate due reporting.
Clause (7): Lack of Due Diligence or Gross Negligence
Text in substance: Not exercising due diligence or being grossly negligent in professional duties is misconduct.
Key ideas:
“Due diligence” – competence and reasonable care consistent with Standards on Auditing and engagement terms.
“Gross negligence” – a higher threshold than mere error; pervasive failure to perform basic procedures.
Courts have observed that disciplinary standards are civil in nature; findings rest on cogent evidence but do not require criminal ‘beyond reasonable doubt’ proof. Where elementary procedures are skipped (e.g., bank confirmations, inventory attendance, related-party scrutiny), sanctions under Clause (7) have been sustained.
Clause (8): Insufficient Appropriate Audit Evidence
Text in substance: Failure to obtain sufficient information necessary for an opinion, or where exceptions are so material that an opinion is negated, is misconduct.
Illustration (banking context): For a branch with ₹600 crore advances, external confirmations for top 60 accounts (≥70% coverage) are absent; no alternative procedures documented. Issuing an unmodified report risks Clause (8).
Clause (9): Departure from Generally Accepted Audit Procedures
Text in substance: Failure to invite attention to a material departure from generally accepted audit procedure applicable to the circumstances is misconduct.
Illustration: Management restricts physical inventory attendance for a critical location. Auditor does not modify the report or draw attention to the scope limitation—Clause (9) is implicated.
Clause (10): Client Monies – Separate Bank Account and Proper Use
Text in substance: Failure to keep client monies (other than fees/remuneration or amounts to be expended) in a separate bank account or using such monies for other purposes is misconduct.
Controls: Designated client bank account, three-way reconciliation, documented client instructions, and periodic external review. In digital settings, segregate UPI/RTGS receipts tagged to client ledgers; never co-mingle with firm operating accounts.
4. Part II — Professional Misconduct Applicable to All Members (Clauses 1–5)
Clause (1): Breach of the Act, Regulations or Council Guidelines
Scope: Any contravention of the Act, the Chartered Accountants Regulations, 1988, the Council General Guidelines, 2008, or other binding guidelines is misconduct. This includes UDIN non-compliance, advertising/solicitation breaches, and peer review obligations where applicable.
Clause (2): Employment Confidentiality
Scope: An employee-member disclosing confidential information acquired in employment, except where required by law or permitted by employer, commits misconduct. Members should incorporate confidentiality clauses in employment contracts and observe employer whistleblowing frameworks (including NOCLAR where adopted).
Clause (3): False Particulars Furnished to ICAI/NFRA/Disciplinary Bodies
Scope: Including particulars known to be false in any information, statement, return or form to the Institute, Council, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority constitutes misconduct.
Examples: Misstating firm constitution, peer review status, or partner details in empanelment applications; fabricating responses during Quality Review.
Clause (4): Defalcation or Embezzlement of Money Received in Professional Capacity
Scope: Misappropriating client funds or funds received in a professional capacity is misconduct independent of criminal liability. Strong internal controls on receipts, approvals, and payments are indispensable.
Clause (5): Acting as Auditor in Contravention of the Companies Act, 2013
Inserted by the 2022 amendments, this provision deems it misconduct to act as auditor contrary to the Companies Act, 2013—e.g., despite disqualifications under section 141, violating rotation under section 139, or accepting prohibited non-audit services under section 144. Firms must maintain a Companies Act compliance checklist before acceptance/continuance.
5. Part III — Other Misconduct
A member (in practice or not) is deemed guilty of other misconduct if held guilty by a civil or criminal court for an offence punishable with imprisonment exceeding six months. This safeguard protects public trust; the Institute may proceed based on the conviction record.
6. Jurisprudence: Selected High Court/Supreme Court Signals
- Disciplinary standards: The Schedules operate as a deeming code of misconduct; proceedings are disciplinary (civil) in nature. Where core audit procedures are skipped or independence is compromised, sanctions are sustained.
- ‘Other misconduct’: High Courts have affirmed severe sanctions, including permanent removal, in egregious integrity breaches (e.g., fabrication of tax challans/returns).
- Clause (7) – Negligence: Numerous decisions uphold findings where auditors failed to obtain confirmations, ignored red flags, or omitted basic reconciliations.
- Companies Act contraventions: Post-2013 regime, acting despite disqualification/rotation limits invites action under both Companies Act and Schedule II.
Illustrative references (non-exhaustive): Council of ICAI v. Mukesh R. Shah (Gujarat HC, 2004): ‘Other misconduct’ for fabricating challans and returns; permanent removal upheld. Delhi HC and other HCs: repeated affirmations of Clause (7) negligence findings. Supreme Court (2024) commentary on the Act’s deeming structure while examining ICAI’s audit ceiling guideline. ICAI Disciplinary Committee orders (2024–2025) reiterating strict views on Clauses (7) and Part II (3).
7. Technological Developments and Their Interaction with Schedule II
7.1 UDIN Regime
UDIN is mandatory for all certificates (from 1 February 2019), GST/Tax audits (from 1 April 2019), and all assurance engagements (from 1 July 2019). Failure to generate or misuse of UDIN can evidence breaches of Clauses (2), (3), or Part II Clause (1). Implement pre-issuance checks in DMS/EQCR logs: no report without a valid UDIN.
7.2 NOCLAR in the Code of Ethics
The revised Code introduces a framework for responding to non-compliance with laws and regulations. While parts were initially deferred, NOCLAR now informs how members escalate and document issues under Clauses (5)–(9). Document internal escalation, legal consultation, and TCWG interactions.
7.3 NFRA/QRB/Quality Review and Digital Evidence
Quality reviews increasingly rely on electronic working papers, confirmations and analytics logs. Inadequate evidence retention or access controls may indicate Clause (8) failures. Adopt cloud systems with robust audit trails and maintain retention as per SA 230 (ordinarily seven years) or higher where required.
7.4 Cybersecurity, Data Privacy and Confidentiality
Clause (1) extends to digital confidentiality: encryption at rest and in transit, MFA, DLP, and breach response plans. Avoid client data on personal devices or unsecured apps; use secure firm channels.
7.5 AI/Analytics and Prospective Information
Use of AI forecasting tools must be framed to avoid Clause (3) implications—ensure disclaimers, scope, and applicable assurance standards for prospective information. Retain model documentation and avoid marketing statements implying certification of forecasts.
8. Practical Controls and Documentation Aids
- Engagement acceptance & independence: Centralized COI checks, annual declarations, and automated surveillance of listed securities.
- Evidence sufficiency: Sampling strategies documented; critical assertions (existence, rights/obligations, valuation, presentation) backed by primary evidence.
- Reporting decisions: Use decision trees for modifications/Emphasis of Matter per SA 705/706; minute TCWG communications.
- Client monies: Dedicated account, power-of-attorney boundaries, approval matrix, and quarterly independent review.
- Regulatory filings to ICAI/NFRA: Four-eye principle before submission; retain basis for every representation.
9. Composite Caselets with Numbers
Caselet A (Disclosure& Misstatement – Clauses 5 and 6): Manufacturing company with revenue ₹480 crore, EBITDA ₹36 crore. Auditor finds ₹7.5 crore capitalization of routine maintenance. Materiality 5% of EBITDA (=₹1.8 crore). Management proposes no adjustment. Actions: communicate to TCWG; if unadjusted and material but not pervasive, issue qualified opinion; include Basis paragraph detailing amounts and standard violated. Failure to disclose/report engages Clauses (5) and (6).
Caselet B (Evidence – Clause 8): Bank branch advances ₹1,200 crore. Top-50 confirmations cover only 35% by value; alternative procedures not performed. Given heightened credit risk indicators (NPA spike from 3.1% to 5.8%), sufficiency is doubtful. Issuing an unmodified LFAR/statutory report risks Clause (8).
Caselet C (Independence – Clause 4): Partner’s HUF holds 1.2% in listed auditee; threshold triggers ‘substantial interest’. Despite partner recusal, firm continues as statutory auditor without safeguards. Opinion issuance would violate Clause (4).
10. The 2022 Amendments and Disciplinary Architecture
The 2022 amendments reconstituted disciplinary bodies, introduced timelines, enabled action against firms, and inserted Part II Clause (5) linking Companies Act auditor contraventions to misconduct. Members must track empanelment eligibility, rotation, and service prohibitions closely—especially in PSU/banking audits.
11. Do’s and Don’ts (Schedule II Lens)
Do’s:
- Embed UDIN/EQCR gates; no UDIN, no report.
- Document independence and conflict checks for every engagement.
- Escalate NOCLAR matters; involve legal counsel where warranted.
- Maintain sufficiency logs mapping each assertion to evidence.
- Operate a segregated client monies account with periodic reconciliations.
Don’ts:
- Do not permit association with client forecasts that suggests certification of outcomes.
- Do not continue audits with unresolved scope limitations without modifying the report.
- Do not understate/overstate information furnished to ICAI/NFRA/QRB.
- Do not accept Companies Act-disqualified audits or violate rotation.
- Do not disclose client information outside legal/consented channels.
12. Foundational Concepts Underlying Schedule II
The clauses of Schedule II are not isolated prohibitions; they draw strength from fundamental ethical principles that define the Chartered Accountancy profession. These principles provide interpretive guidance when disciplinary clauses are applied and align Indian practice with global standards such as IFAC’s International Code of Ethics.
12.1 Professionalism
Professionalism implies that members place the interest of the public and profession above personal or client gain. Schedule II Clauses (5)–(9) on disclosure, misstatements, diligence, evidence and GAAS compliance are rooted in this expectation. A CA is not merely an accountant but a watchdog of public trust.
12.2 Integrity
Integrity means being straightforward and honest in all professional and business relationships. Clauses (1), (2) and Part II (3) directly reflect integrity—confidentiality, true certifications, and truthful disclosures. Compared with some global counterparts (e.g., AICPA in the USA), ICAI’s Schedule II prescribes more detailed misconduct categories but shares the same foundation: truthfulness and honesty as non-negotiable.
12.3 Confidentiality
Confidentiality, as seen in Clause (1) and Part II (2), requires not only non-disclosure of client information but also responsible safeguarding of data in an age of cyber risks. The ICAEW Code (UK) also imposes similar duties; however, ICAI uniquely provides for statutory disciplinary consequences under the Act itself, giving enforceability a sharper edge.
12.4 Due Care and Avoidance of Negligence
Clauses (7) and (8) emphasise diligence and sufficiency of evidence. Gross negligence attracts stronger penalties than in some other professional frameworks where negligence may be remedied civilly but not always as misconduct. ICAI’s explicit deeming provisions highlight that carelessness at scale is not excusable.
12.5 Equality of Opportunities
Professionalism extends to equal opportunities within the firm and in dealings with clients. Although Schedule II does not use the phrase directly, the ICAI Code of Ethics and Council Guidelines mandate fairness, non-discrimination and merit-based opportunities. Internationally, IFAC also stresses non-discrimination and inclusivity as ethical imperatives.
13. Comparative Note with Other Professional Accounting Bodies
- **ICAI vs IFAC**: ICAI’s Schedule II is legally binding under the Act, while IFAC’s Code is recommendatory unless adopted by local bodies. ICAI thus wields statutory enforcement.
- **ICAI vs AICPA (USA)**: AICPA relies on peer reviews and voluntary compliance mechanisms, whereas ICAI disciplinary committees can impose removal of name from register—direct livelihood consequences.
- **ICAI vs ICAEW (UK)**: ICAEW emphasises principles (integrity, objectivity, competence), whereas ICAI supplements principles with detailed clause-based misconduct, offering greater clarity but also rigidity.
- Across jurisdictions, confidentiality, independence, and diligence remain common; differences lie in statutory force and procedural machinery.
14. Integration of Principles with Schedule II Clauses
- Confidentiality → Clause (1), Part II (2)
- Integrity → Clause (2), Clause (3), Part II (3)
- Due Care → Clause (7), Clause (8)
- Professionalism → Clause (5), Clause (6), Part II (1)
- Equality of Opportunities → Reflected in Council Guidelines; supportive of the broader ethos of Clause (7) diligence in managing teams and clients fairly.
15. Conclusion
Schedule II is the profession’s hard guardrail. Its clauses are interlinked with the Standards on Auditing, the Code of Ethics, the Companies Act, 2013, and newer regulatory features like UDIN and quality reviews. For practitioners, consistent documentation, independence discipline, and transparent reporting are the best defence. In an era of digital audits and analytics, the spirit of Schedule II—fair presentation, independence and due care—remains unchanged while evidentiary expectations have risen.
Select References (for further reading)
- Chartered Accountants Act, 1949 – Second Schedule (as amended in 2022).
- ICAI, Code of Ethics (2020, updated) – including NOCLAR guidance.
- ICAI UDIN Announcements (2019 onwards).
- Council of ICAI v. Mukesh R. Shah (Gujarat High Court, 2004).
- Supreme Court (2024) discussion on ICAI’s powers in the tax-audit cap matter.
- ICAI Disciplinary Committee orders (2024–2025) on Clauses (7) and Part II (3).
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