Ethical issues in Auditing

Ethical issues in Auditing

1. Introduction: Ethics is crucial for Chartered Accountants to ensure trust and integrity in financial reporting, auditing, taxation, and consulting services. Adherence to ethical principles and professional standards is crucial for maintaining public trust and confidence in the auditing process and financial reporting. Breaching ethical standards can have severe impact leading to penalties.

2. The Role of ethics in Chartered Accountancy: A collection of moral guidelines that influence action and judgement make up ethics. Acting in customers’ best interests, retaining professional competence, and abiding by pertinent rules and regulations are all examples of ethical behaviour in the context of chartered accounting. Building trust and reputation via ethical behaviour is crucial for the profession’s success.

3. Understanding the Fundamental Principles of ethical behaviour in Chartered Accountancy: The Institute of Chartered Accountants of India (ICAI) has established a Code of Ethics for CAs, which outlines the fundamental principles of ethical behaviour. The principles are:

A) Objectivity:

Auditors must approach their work with impartiality and independence, free from any bias, personal beliefs, or undue influence. They must evaluate evidence and form conclusions based solely on the facts and professional judgment.

B) Confidentiality:

Auditors are entrusted with sensitive information and must respect the confidentiality of the information obtained during the course of their work. They should only disclose such information when authorized or legally obligated to do so.

C) Professional Competence and Due Care:

Auditors should maintain the knowledge, skills, and expertise necessary to perform their duties competently. They must continually develop their professional knowledge, act diligently, and exercise sound judgment in applying auditing standards.

D) Integrity:

Auditors should be honest and straightforward in all their professional and business relationships. They must act in good faith, without deception or misrepresentation, and avoid conflicts of interest.

E) Professional Behaviour:

Auditors must comply with relevant laws and regulations and avoid any conduct that discredits the profession.

4. Ethical issues faced by the Auditors while providing their services:

A) Deriving self-interest: A threat that a financial or other interest will improperly affect the assessment or the conduct of an auditor, e.g.:

• A financial interest in a client
• Quoting a low fee with a view to receiving a new order and quoting a fee on such a low level that it could hinder the performance of professional engagement for this price in line with the applicable technical and professional standards.
• Having a close business relationship with a client
• Having access to confidential information which could be used for personal gain.

B. Pressure from Management: Pressure from Management may be in many forms sometimes direct and indirect which may be termed as “in the best interests “of the organisation or firm, g:

• Pressure could be made on Head of Auditor (statutory/internal) to change the content of audit reports or papers to Audit Committees if the contents do not reflect favourably on Management.
• Internal auditors are under continuous pressure to “strike the balance” between their independence as auditors and provide support to Management in operational duties such as assisting in tender evaluations, participating in employee recruitment process and disciplinary tribunals.

C. Promoting the client’s interests: A threat that an auditor is going to promote the client’s standpoint or the standpoint of the organisation employing him/her to a degree threatening his/her objectivity, e.g:

• Promoting the client’s interests or client’s shares by an auditor.
• The auditor acting as the client’s advocate in litigation or in disputes with third parties.

D. Familiarity: A threat that on account of a long or close relationship with the client or the organisation employing the auditor, the auditor is too sympathetic towards their interests or agrees with their operation, e.g:

• The member of a close or immediate family of an auditor holds the function of a client’s director or employee.
• The director or a client’s employee or an employee holding a position that makes it possible to exert significant influence on an issue which is the object of the engagement, recently providing services as a partner responsible for the engagement.
• The member of a team performing the audit has a long-term relationship with the assurance client.

E. Delay by Management in the timely completion of audits: Management plays a critical role in timely completion of audits ,eg:

• Timely completion of audits may be affected when information or records required for audit purposes are not released promptly or responses required from Management are unnecessarily delayed.
• Sometimes Management may withhold or delay release critical information which should generally be provided, on the basis of confidentiality or sensitivity, The reason for such delays can sometimes be attributed to preventing release of the final audit report to the Audit Committee or implementation of audit recommendations especially those made in draft reports, prior to finalisation of the audit report.

F) A threat that on account of a long or close relationship with the client or the organisation employing the auditor, the auditor is too sympathetic towards their interests or agrees with their operation, e.g:

• The member of a close or immediate family of an auditor holds the function of a client’s director or employee.
• The director or a client’s employee or an employee holding a position that makes it possible to exert significant influence on an issue which is the object of the engagement, recently providing services as a partner responsible for the engagement.
• The member of a team performing the audit has a long-term relationship with the assurance client.

5. Consequences of Breaching Ethical Standards in Chartered Accountancy:

Breaching ethical standards in Chartered Accountancy can have severe consequences. It can lead to disciplinary action by the ICAI, loss of professional reputation, and legal liability. It can also result in financial losses for clients and damage the profession’s credibility.

6. Conclusion:

In conclusion, ethical issues are a significant concern for auditors. By maintaining high standards of ethical behaviour and complying with professional standards and regulations, chartered accountants can ensure that they provide high-quality services to their clients and maintain the trust and integrity of the profession.