In this editorial, the Author shall discuss 'Management Services' which are not allowed to be provided by Statutory Auditors.
A. Restricted Services by Auditor
An auditor appointed under this Act shall not provide the following services directly or indirectly to the company or its holding company or subsidiary company:
• accounting and book-keeping services;
• internal audit;
• design and implementation of any financial information system;
• actuarial services;
• investment advisory services;
• investment banking services;
• rendering of outsourced financial services;
• management services; and
• any other kind of services as may be prescribed:
In this editorial, author shall describe the Management Services.
B. MANAGEMENT SERVICES
Management services vis-à-vis management consultancy services: Section 144 has used the words 'managements services' while section 2(2)(iv) of the Chartered Accountants Act, 1949 read with Regulation 190A (supra) have used the words 'management consultancy services'. In this regard, attention of Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949 to be looked into and which says that
'Clause 11: If he engages in any business or occupation other than the profession of chartered accountants, unless permitted by the Council to so engage;
Provided that nothing contained therein shall disentitle a chartered accountant from being a director of a company (Not being managing director or a whole time director), unless he or any of his partners is interested in such company as an auditor.'
Thus, it follows that the scope of section 144(h) of the Companies Act, 2013 cannot go beyond section 2(2)(iv) and Regulation 190A (supra), in light of the provisions contained in aforementioned Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949.
Management Consultancy Services: As per Section 2(2), a member of the Institute shall be deemed to be in practice when individually or in partnership with chartered accountant(s) in practice, he in consideration of remuneration
received or to be received:
i. engages himself in the practice of accountancy; or
ii. offers to perform or performs services involving
- auditing; or
- verification of financial transactions, books, records; or
- preparation, verification or certification of financial accounting statements and related statements or holds himself out to the public as an accountant;
iii. renders professional services or assistance in or about matters relating to accounting procedure or the recording, presentation, or certification of financial facts or data; or
iv. renders such other services as in the opinion of the Council may be rendered by Chartered Accountant in practice.
Regulation 190A of the Chartered Accountants Regulations, 1988, states that a chartered accountant in practice cannot engage in any business or occupation other than the profession of accountancy and such other services as may be prescribed by the Council of ICAI. In the opinion of the Council of ICAI, the 'other services' that may be rendered by a chartered accountant as described in Section 2(2)(iv) will include the entire range of management consultancy services, as described below:
i. financial management planning and financial policy determination;
ii. capital structure planning;
iii. working capital management;
iv. preparation of project reports and feasibility studies;
v. preparing cash budgets and other budgets, cash flow statements, profitability statements etc.;
vi. inventory management, price fixation and other management decision making;
vii. personnel recruitment and selection;
viii. management and operational audit;
ix. advise regarding mergers and amalgamations;
x. systems analysis and computer related services;
xi. acting as advisor or consultant to an issue, including matters such as:
- drafting of prospectus and memorandum containing salient features of prospectus;
- drafting and filing of listing agreement and completing formalities with Stock Exchanges, ROC and SEBI;
- preparation of publicity budget;
- advice regarding selection of various agencies connected with issue such as Registrars to Issue, printers and advertising agencies;
- advice on post issue activities;
xii. investment counseling in respect of securities as defined in SCRA, 1956 and other financial instruments;
xiii. acting as Registrar to an Issue and for transfer of shares/other securities;
xiv. quality audit, environment audit, energy audit;
xv. acting as Recovery Consultant in the Banking sector;
xvi. insurance financial advisory services under IRDA, 1999, including insurance brokerage.
It is to be noted that the activities of brokering, underwriting and portfolio management are not permitted.
It follows that the scope of section 144(h) of the Companies Act, 2013 cannot go beyond section 2(2)(iv) and Regulation 190A (supra), in light of the provisions contained in aforementioned Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949.
Thus, when a particular service falls within management service under section 144(h) of the Companies Act, 2013 and is hence restricted, should be assessed on the following considerations:
a) Whether the service is within the purview of management services read with Regulation 190A (supra);
b) Whether by rendering such a service the auditor is not performing any managerial function or not making any managerial decisions;
c) Whether the auditor is merely reviewing and reporting on the work done by the audit client or by a third-party specialist employed by the audit client because, in such a situation the 'third party or the audit client is
the source of the financial information subject to the review or audit' and 'the auditor will not be reviewing or auditing his or her own work.
If the answers to the above three considerations are in affirmative then such a service is not restricted under section 144(h) of the Companies Act, 2013
For instance: Filing VAT/ Service Tax Returns, Filing IT/ TDS Returns, Filing ROC forms which are not to be certified by any professional, Issuing opinions on Tax, FEMA or other issues etc. are not fall under the definition of Section 144(h) of the Act.