Code of Conduct for Organisations

By;
CA Kamal Garg
[B. Com (H), FCA, DISA (ICAI)]
cakamalgarg@gmail.com
 Introduction

A code of conduct is a set of rules outlining:

1. the responsibilities of; or
2. the proper practices for
an individual, party or organization
 Introduction
Responsibility refers to the managerial commitment or duty;
Proper Practices refer to the modus operandi for executing
and fulfilling such managerial commitment or duty
In its 2007 International Good Practice Guidance, "Defining
and Developing an Effective Code of Conduct for
Organizations", the International Federation of
Accountants (IFAC) provided the following working definition:
"Principles, values, standards, or rules of behavior that
guide the decisions, procedures and systems of an
organization in a way that:
(a) contributes to the welfare of its key stakeholders, and
(b) respects the rights of all constituents affected by its
operations."
 Significance of Code of Conduct
Code of Conduct is the standard of expected ethical
behaviour for the company's management and employees. It
is about holding oneself to the highest standards of
ethical business behaviour;
Typically Codes talk about expectations to:
1. obey the law,
2. conflicts of interest,
3. insider trading,
4. preserving confidential information,
5. bribery,
6. corporate opportunities,
7. competition and fair dealing among other things
 Legal Backing to Code of Conduct
US Scenario:
Section 406 of the Sarbanes-Oxley Act of 2002
("SOX") directed the Securities and Exchange
Commission to issue rules requiring each public
company to disclose whether or not it has adopted
a code of ethics that applies to certain of the
company's key officers;
In accordance with the mandate of SOX, the SEC
adopted final rules implementing Section 406 of
SOX in January 2003
 Legal Backing to Code of Conduct
The final rules define the term "code of ethics" as written standards that
are reasonably designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
2. Full, fair, accurate, timely and understandable disclosure in reports
and documents that a company files with or submits to the SEC and in
other public communications made by the company;
3. Compliance with applicable governmental laws, rules and
regulations;
4. The prompt internal reporting of any violations of the code of ethics
to an appropriate person or persons identified in the code of ethics; and
5. Accountability for adherence to the code of ethics.
 Legal Backing to Code of Conduct
Indian Scenario:
As per Clause 49 of the Listing Agreement,
The Board shall lay down a code of conduct for all
Board members and senior management of the
company. The code of conduct shall be posted on the
website of the company.
All Board members and senior management personnel
shall affirm compliance with the code on an annual
basis. The Annual Report of the company shall
contain a declaration to this effect signed by the
CEO.
 Code of Conduct imbibed under
Companies Act
Failure to maintain register of members (Section 150);
Failure to hold annual general meeting as per law
(Section 166);
Acting as director without holding qualification shares
(Section 272);
Acting as a director of more than 15 companies (Section
279);
Default in giving notice of Board meetings (Section 286);
Failure to appoint a whole-time secretary (Section 383A)
 Code of Conduct imbibed under
Companies Act
Wrongfully withholding or wrongfully taking possession
of property of the company by an officer (Section 630);
Failure to keep proper books of account, etc. (Section
209);
Failure to lay balance sheet and profit and loss account
at the AGM (Section 210);
Failure to prepare balance sheet and profit and loss
account showing a true and fair view (Section 211);
Omission to make repayment of deposit (Section 58A)
Code of Conduct imbibed under
SEBI Act, 1992
 Penalties under the SEBI Act
Section 15A:
1. Failure to furnish any document, return or report to SEBI;
2. Failure to file any return or furnish any information, books or
other documents to SEBI;
3. Failure to maintain the books of account or records
Section 15B: Failure by an intermediary to enter into an
agreement with his client;
Section 15C: If SEBI calls upon a listed company or any
intermediary to redress the investor grievance, but fails to
redress such grievance within the time specified by SEBI
 Penalties under the SEBI Act
Section 15F

Registered Stock Broker

Fails to deliver any Fails to issue Charges brokerage

Security or Fails to Contract Note in in excess of that
make pymt of the amt form and manner specified in the
due to investor prescribed by SE Regulations
 Penalties under the SEBI Act
Section 15G: Where an Insider:
1. deals in securities of a body corporate listed on any SE on
the basis of unpublished price sensitive information
(UPSI);
2. communicates any UPSI to any person except as required
in the ordinary course of business or under any law;
3. counsels, or procures for any other person to deal in any
securities of any body corporate on the basis of UPSI
 Penalties under the SEBI Act
Section 15HA: Person indulging in fraudulent and unfair
trade practices relating to securities;
Section 15HB: Failure to comply with any provision of this
Act, Rules, or Regulations made thereunder or directions
issued by SEBI for which no separate penalty has been
provided;
Code of Ethics for ICAI Members
First Schedule:
Part I
Clause 6
Clause 11
Clause 12
 First Schedule: Part I:
Clause 2
Professional Misconduct if
Directly or Indirectly
1. Pays; or
2. Allows; or
3. Agrees to pay or allow
Any share, commission or brokerage in the
1. Fees; or
2. Profits
Of his professional business with Non-
members
 First Schedule: Part I:
Clause 2
Exceptions:
1. ICAI Member;
2. Partner;
3. Retired Partner;
4. Legal Representative (LR) of deceased partner
Widow or LR of partner only if Deed provides;
Widow or LR of proprietor can receive only
goodwill but no participation in earnings of the firm
5. Member of other specified professional
bodies;
6. Specified qualified persons
 First Schedule: Part I:
Clause 3
Professional Misconduct if:
1. Accepts; or
2. Agrees to accept
Any part of the profits of
professional work from Non-
member
 First Schedule: Part I:
Clause 3
Exceptions:
1. ICAI Member;
2. Member of other specified
professional bodies;
3. Specified qualified persons
 First Schedule: Part I:
Clause 4
Professional Misconduct if:
1. Enters into partnership;
2. In or outside India
with Non-members
Exceptions:
1. ICAI Member;
2. Member of other specified
professional bodies;
3. Specified qualified persons
 First Schedule: Part I:
Clause 5
Professional Misconduct if:
1. Secures work from Non-members

Exceptions:
1. Employee;
2. Partner;
3. Other open means (e.g. Clause 6 or 7);
4. Persons as per Clause 2, 3 and 4
 Professional Bodies
for Clause 2, 3 and 5
1. ICSI;
2. ICWAI;
3. Bar Council;
4. Indian Institute of Architects;
5. Institute of Actuaries
 Specified Qualified Persons
for Clause 2, 3, 4 and 5
1. CS;
2. CWA;
3. Bachelor in Law (from recognised
University or Institution);
4. Bachelor in Engineering;
5. Bachelor in Architecture;
6. Actuary;
7. B Tech;
8. MBA (from recognised University or
Institution recognised by AICTE)
 Membership of Professional
Bodies
for Clause 4
1. ICSI;
2. ICWAI;
3. Advocate (i.e. member of Bar Council);
4. Engineer (i.e. member of Institution of
Engineers);
5. Architect (i.e. member of Indian
Institute of Architects);
6. Actuary (i.e. member of Institute of
Actuaries)
First Schedule:
Part II
First Schedule:
Part III
Second Schedule:
Part I
Clause 1
Clause 2
Clause 3
Clause 4
Clause 8
Clause 9
Clause 7
Second Schedule:
Part II
 Central Council General Guidelines,
2008
(earlier referred as ICAI Notifications)
 Books of Accounts
Practicing CA/ Firm to maintain
proper books including:
1.Cash book;
2.Ledger
 Tax Audit Assignments u/s
44AB
Limited up to 45 in a financial year;
This limit is applicable on per partner
basis;
Each year audit is a separate audit
assignment;
Maintain record of assignments;
Part Time practicing CA shall not be
considered
 Number of Audit
Assignments under
Companies Act, 1956
Limits u/s 224(1B) + Exemptions u/s
224(1B) < 30;
Maintain record of audit assignment;
Limit applicable to per practicing CA;
Part time practicing CA not counted
 Minimum Audit Fees
(omitted w.e.f. June 7th
2011)
 Undisputed Audit Fees
Guilty if appointment as an auditor
accepted
Where
Undisputed audit fees, has not been
paid by the entity to previous auditor
Exception : Audit of Sick Unit
Appointment as Cost Auditor u/s
233B
Guilty if accepts appointment u/s
233B while he is:
1.Auditor of Company u/s 224;
2.Officer or employee of company;
3.Partner or employee of (2);
4.Partner or employee of (1);
5.Indebted/ provided guarantee/
security to company for > Rs. 1,000
 Appointment as Auditor while
indebted
Guilty if:
1.Accepts appointment as auditor u/s 224
when indebted > Rs. 1,000;
2.Accepts appointment as auditor in other
cases when indebted > Rs. 10,000;
3.If other limits given by some other
statute then they would be applicable
Internal auditor, concurrent auditor not
covered by this Guideline;
In case of firm, if one partner is ineligible,
then whole firm is ineligible
 Remuneration for Statutory
Audit and Other Work
Applicable to audit and other work of only:
1.PSU;
2.Govt. Co.;
3.Listed Co.;
4.Other Public Co. having turnover > Rs. 50
crores in a year
Other Work Fees > Statutory Audit
Fees = Guilty of Professional
Misconduct
Remuneration for Statutory
Audit and Other Work
Other Work as per Section 2(2)(iv) &
Regulation 190A but does not include:
1.Audit under any other statute;
2.Certification work done by statutory
auditors;
3.Representation before an authority
Guideline applicable to CA in
aggregate (i.e. collectively to their
firm/ MCC/ associates etc.)
 Developing Model Code of Conduct
Typically, a Code of Conduct for any organisation
should have the following essential elements:
1. Preamble
2. Applicability
3. Set of Rules including contribution to the society, being
honest and integral, maintaining confidentiality,
teamwork, compliance with applicable laws and
regulations, dealing with media, observing entitys
discipline mechanism, related party transactions, etc.
4. Continuous updating the laid down code of conduct
Challenges in implementing Code of Conduct
An important and implicit assumption of many writings on
corporate codes is that such codes do have a 'real' effect
upon behaviour;
This tends to be something that is taken for granted, but it
is not empirically validated by subsequent investigation
It is important to note that codes of conduct do not in
themselves invoke compliance.
Even with a code of ethics, ethical behavior is not
necessarily assured.
Conformance with code of conduct is influenced by three
factors, namely:
1. the extent of internalization of the codes,
2. effects of non-compliance, and
3. group identity pressures
 General Observations for being
ineffectiveness of Code of Conduct
1. Majority of employees are ignorant of the code of conduct;
2. Lack of adequate and regular education of employees about
code of conduct affected its practice;
3. Senior managers never practice what the code of conduct says;
4. Code of conduct is just on paper not being practiced;
5. Code of conduct has brought about very little or no change into
the behaviour of public servants;
6. Too many inconsistencies and impartiality in administering code
of conduct have made it unsuccessful;
7. Copies of the codes are not made available to staff;
8. The language of the code of conduct is too difficult to
comprehend;
9. Code of conduct is obsolete;
10. The administrative culture does not encourage good behaviour
 Model Code of Conduct*
Preamble:
Commitment to ethical professional conduct is a MUST for every
employee at ABC Limited in all of its businesses/ units/
subsidiaries. This code, consisting of imperatives formulated as
statements of personal responsibility, identifies the elements of
such a commitment. It contains many, but not all, issues employees
are likely to face.
The code is intended to serve as a basis for ethical decision-
making in the conduct of professional work. It may also serve as a
basis for judging the merit of a formal complaint pertaining to
violation of professional ethical standards.

*extracted from one of the listed companys website

 Model Code of Conduct
Applicability:
This code is applicable to the Board Members, members of the
Management Committee and all employees in and above Officers
level (hereinafter collectively referred to as Employee(s)).
All employees must read and understand this code and ensure to
abide by it in their day to day activities.
 Model Code of Conduct Other Elements
Contribute to society and human well-being:
This principle concerning the quality of life of all people affirms an
obligation to protect fundamental human rights and to respect the
diversity of all cultures. We must attempt to ensure that the products
of our efforts will be used in socially responsible ways, will meet
social needs and will avoid harmful effects to health and welfare of
others
Avoid harm to others:
"Harm" means injury or negative consequences, such as loss of
property, property damage or unwanted health and environmental
impacts. This principle prohibits use of men, material and technology
in ways that result in harm to our consumers, employees and the
general public.
 Model Code of Conduct Other Elements
Be honest and trustworthy:
Honesty is an essential component of trust. Without trust an
organization cannot function effectively. All of us are expected
not to make deliberately false or deceptive claims about our
products/ systems, but instead provide full disclosure of all
pertinent limitations and problems.
Be fair and take action not to discriminate:
The values of equality, tolerance, respect for others, and the
principles of equal justice govern this imperative. Discrimination
on the basis of race, sex, religion, age, disability, national
origin, or other such factors is an explicit violation of this code.
 Model Code of Conduct Other Elements
Practice integrity in our inter-personal relationships:
In our relationships with colleagues, we should treat them with respect
and in good faith; in the same way we ourselves would expect them to
treat us. The principle to be adopted to guard against loose talk or in its
worst form-character assassination- is not to say anything behind ones
back and never utter something, which cannot be put in writing.
Honor confidentiality:
The principle of honesty extends to issues of confidentiality of
information. The ethical concern is to respect all obligations of
confidentiality to all stakeholders unless discharged from such
obligations by requirements of the law or other principles of this code.
We, therefore, will maintain the confidentiality of all material non- public
information about ABC Limiteds business and affairs.
 Model Code of Conduct Other Elements
Practice integrity in our inter-personal relationships:
In our relationships with colleagues, we should treat them with respect
and in good faith; in the same way we ourselves would expect them to
treat us. The principle to be adopted to guard against loose talk or in its
worst form-character assassination- is not to say anything behind ones
back and never utter something, which cannot be put in writing.
Honor confidentiality:
The principle of honesty extends to issues of confidentiality of
information. The ethical concern is to respect all obligations of
confidentiality to all stakeholders unless discharged from such
obligations by requirements of the law or other principles of this code.
We, therefore, will maintain the confidentiality of all material non- public
information about ABC Limiteds business and affairs.
THANK YOU