Page 75 - DCOM204_AUDITING_THEORY

Unit 4: Section 226, 314 and Code of Ethics

and simultaneously the list of Chartered Accountants, whose work is undesirable, can Notes
also be evolved. Such lists may be shared by nationalized banks amongst themselves.
Further, if it is found that the Chartered Accountant has not adequately reported
nonadherence of the laid down Statements Standards and/or Guidance Notes in preparing
his reports, the concerned banks should report the matter to the Institute of Chartered
Accountants of India, who should take the required action against the concerned Chartered
Accountant within a specific time schedule.
(b) It could be made mandatory that companies should change their ‘statutory auditors’ every
3 years. Periodic changes will be healthy.

4.3.3 Purpose of Code of Ethics

The purpose of Code of Ethics is to promote an ethical culture in the profession of auditing and
provides guidance to Auditors serving others. Auditing is an independent, objective assurance
and consulting activity designed to add value and improve an organization’s operations. It
helps an organization accomplish its objectives by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control, and governance processes.

Caselet KPMG Canada: Lack of Independence

n June 2005, the Securities and Exchange Commission entered into a settlement, in an
enforcement action, with KPMG LLP (KPMG Canada), a Canadian audit firm, and two
Iof its partners, Gary Bentham, the audit engagement partner, and John Gordon, the
concurring and SEC reviewing partner. The SEC asserted that KPMG Canada, Bentham
and Gordon lacked independence when they audited the 1999 through 2002 financial
statements of Southwestern Water Exploration Co. (Southwestern), a now-bankrupt
Colorado corporation.

The SEC claimed that KPMG Canada provided bookkeeping services to Southwestern and
then audited its own work. Specifically, after KPMG Canada prepared certain of
Southwestern’s basic accounting records and financial statements, it issued purportedly
independent audit reports on those financial statements. KPMG Canada’s audit reports
were included in Southwestern’s annual reports that were filed with the Commission.
The SEC found that KPMG Canada, Bentham and Gordon engaged in “improper
professional conduct” within the meaning of Rule 102(e) of the SEC’s Rules of Practice by
virtue of their violations of the auditor independence requirements imposed by the
Commission’s rules and guidance and by generally accepted auditing standards in the
United States.

4.3.4 Importance of the Code of Ethics

A code of ethics is necessary and appropriate for the auditing profession. Founded as it is on the
trust placed in its objective assurance about risk management, control, and governance.
The Code of Ethics extends beyond the definition of auditing to include two essential components:
1. Principles that is relevant to the profession and practice of auditing;

2. The Rules of Conduct describe behavior norms expected of auditors. These rules are an aid
to interpreting the Principles into practical applications and are intended to guide the
ethical conduct of auditors. Below they are set out together with the principle they interpret.

LOVELY PROFESSIONAL UNIVERSITY 69