Ethics and Business Law
This domain tests the ICAI Code of Ethics (aligned with the IESBA Code), professional independence, the NOCLAR response, and core Indian business law - particularly contract essentials under the Indian Contract Act 1872 and directors' duties under the Companies Act 2013.
Core rules
- Five threats: self-interest, self-review, advocacy, familiarity, intimidation. Identify the threat, evaluate its significance, then apply safeguards or decline the engagement.
- Safeguards include independent quality review, disclosure to those charged with governance, rotation of engagement partners and removal of the conflicting service.
- Independence is both of mind and in appearance: financial interests in clients, loans, significant gifts and long association are restricted; the fee-dependence threshold for a listed audit client is 15% of total fees for consecutive years.
- NOCLAR (Sections 260 and 360 of the Code): if a client's non-compliance with laws and regulations is identified, the member considers communicating with those charged with governance, then with the external auditor, and may need to withdraw or report.
- Indian Contract Act 1872: offer, acceptance, lawful consideration, capacity, free consent, lawful object, and the agreement must not be expressly declared void (Sections 2(h) and 10).
- Companies Act 2013 Section 166: a director acts in good faith, in the company's best interests, avoids conflicts and cannot make undisclosed personal gain.
Worked example
An audit firm derives 18% of its total fees from one listed audit client for three consecutive years. This is a self-interest threat to independence that is above the 15% threshold, so a safeguard alone may be insufficient. The firm should disclose to the audit committee, arrange an independent engagement quality review, and plan rotation or resignation if the dependence persists. If the same client then pressures the partner to drop a disclosure with a threat to appoint another firm, that adds an intimidation threat requiring escalation to governance.
Traps
Treating an ethical threat as automatically disqualifying instead of applying the threat–safeguard framework; confusing breach of contract with illegality when testing contract validity; and overlooking that free consent is missing where consent is caused by coercion, undue influence, fraud, misrepresentation or mistake.