Government plans more restrictions on audit firms
Audit firms may face more restrictions on the juicy non-audit assignments they could accept from statutory audit clients. This is part of a government initiative to tighten the rules to improve the quality of statutory audit.
The ministry of corporate affairs and the National Financial Reporting Authority have been assessing how the quality of audit can be further improved and whether the list of non-audit services that auditors are barred from accepting should be widened in order to prevent a conflict of interest, corporate affairs secretary Injeti Srinivas said in an interview.
The idea is to ensure that any pecuniary relationship on account of offering non-audit services do not compromise auditors in giving a true and fair picture of the audited company’s financial health.
“We need to see if the already strict provisions should be further tightened,” said Srinivas, indicating that a ban on auditors accepting non-audit services cannot be ruled out.
At present, the Companies Act, 2013, disallows statutory auditors from directly or indirectly offering eight specified services, including internal audit and actuarial and investment banking services, to their clients. Auditors are barred from offering such services to the audited entity’s parent or subsidiary. This would also empower the government to disallow any other services in the future.
However, there are other lucrative services that are outside the purview of this list, such as tax audit, secretarial services, transfer pricing-related services, and mergers and acquisitions advisory that statutory auditors are free to offer to their clients.
Traditionally, audit firms have other companies in their network to offer non-audit services. However, according to industry executives, having a network partner firm offering non-audit services could pose conflict of interest to the audit firm, as profits are shared among partners across the network.
“If one firm in the general network is offering statutory audit, it is unethical for any other firm in that network to accept non-audit consultancy of any type other than tax audit and transfer pricing audit (from the same client),” said Amarjit Chopra, former president of accounting rule maker Institute of Chartered Accountants of India (ICAI).
The move to tighten audit rules comes in the wake of the collapse of non-bank lender Infrastructure Leasing and Financial Services Ltd (IL&FS) and the ongoing investigation by various regulatory agencies into the role of some of the directors on the company’s board, rating agencies and statutory auditors of group companies. The investigators are looking into how the financial crisis building up over the years went undetected till group firms started defaulting on repayment obligations.
IL&FS’s payment defaults triggered a liquidity crisis in the nonbanking financial sector, which has negatively impacted the real estate industry, as well as small and medium enterprises.