A New Concept:
Section 144 of the Indian Penal Code is normally promulgated to avoid unlawful assembly of people with attempt to cause public disturbance. It is not on normal situations. But, for number sack of the Section 144 of the Companies Act 2013 on ‘Auditor not to render certain services’ what about its reach? It is phenomenal in the sense that it is day to day attempt to obliterate any situations that is apprehended to cause malefic effect on Independence of Auditors by expressly indicating the services not to be rendered by the auditor/s. Perhaps, the section is primarily inserted to ward off situations that may cause threat to independence and that the root for that malady is nipped in the bud.
Hence, Section 144 of the Companies Act 2013 on ‘Auditor not to render certain services’ is a new valiant concept purposefully introduced in the Act which, in unequivocal language, has chosen to list out certain services whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:—“
- 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
Provided that an auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall comply with the provisions of this before the closure of the first financial year after the date of such commencement.
Explanation. For the purposes of this sub-section, the term “directly or indirectly” shall include rendering of services by the auditor,—
(i) in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
A glance of the above explanation makes it crystal clear there should be no iota of doubt on the independence of the auditors and that has propelled the necessity for the insertion of the Section.
Of the above, a small write up is given on Items a little later in the article on a) Accounting and book keeping services; Item h) on Management services and item i) on Any other kind of services as may be prescribed that are more generic needing a few elucidation.
How handled in earlier dispensation?
There is no visible equivalent section under the Companies Act 1956 to regulate the above prohibited services. But, the Chartered Accountant Regulation Act & revised Guidance Note on Independence of Auditors issued by the Council of the Institute of Chartered Accountants of India have guided the Auditors regarding the acceptance or otherwise of certain services other than audit that are dealt with a little later.
The role of the New Section:
Now, Section 144 of the Act has taken on its shoulders to give a clear legal direction on the issue other than Ethical requirements demanded of Auditors to ensure Independence of auditors.
The Section though primarily intended to codify and list out prohibited services under the head “Auditor not to render certain services”, if it is seen a little minutely, it may be noticed that another issue cropping up regarding acceptance of admissible services other than prohibited ones. Both the issues are handled underneath item wise:
Non admissible Services:
Non admissible Services as indicated in the Section are already listed earlier under’ Para Vigilant Concept’.
In this context, the pertinent question is whether an auditor of a holding/its subsidiary company can perform excluded/ prohibited in other group companies?
A reference to the specific question &answer no. 54 of CA Ethics Plus will be highly relevant and throw light. To quote, it runs as follows:
‘54. Whether a Chartered Accountant is qualified to be appointed as statutory auditor of one subsidiary company when he is the internal auditor of another subsidiary of the same holding company?
No, a member in practice in not qualified to be appointed as statutory auditor of one subsidiary company when he is the internal auditor of another subsidiary of the same holding company. In this regard, attention is drawn to the following directions as appearing at pages 150 to 154 of Code of Ethics:
“Public conscience is expected to be ahead of the law. Members, therefore, are expected to interpret the requirement as regards independence much more strictly than what the law requires and should not place themselves in positions which would either compromise or jeopardize their independence.”’
The above comment suggests an auditor of any subsidiary of a group is not to accept other prohibited services in the same group companies.
Regarding, the direction of the Section on accepting services other than the prohibited ones; pointed attention is invited particularly to the first Para of Section 144 which is quoted verbatim below:
“An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:—“
A plain reading of the above clearly spell out in unambiguous language that even other admissible services to be rendered by an auditor are to be approved by the Board of Directors or the audit committee. This has to be noted both by the auditors and auditees coming under the Act.
Accounting & book keeping services- on item (a) above:
‘Accounting & book keeping services’ are not either defined or explained even in the Institute Guideline. In common parlance, Book keeping is usually understood as the process of recording in chronological order daily transactions of business entity & it forms part of the accounting information system. But, on the other hand, accounting is on the higher level &hence considered as an art of identifying, recording, classifying & summarizing in significant manner & in terms of money. In other words, it helps to give a true & fair view of the financial statements of the entity for a particular period. In the absence of clarity on this, what is so long accepted norm is the assignment of accounting & book keeping is a back office service that naturally the auditor of the company cannot under take. However, helping on implementation, say of Ind. AS whether will come under the notch of this “clause (a)” of section 144 of the Act is yet to be addressed by MCA or ICAI especially when Fair valuation is involved under Ind. AS in different circumstances, where normally an auditor of company should not involve because clash of interest in forming opinion on the Audit.
Self-review threats & Advocacy threats:
But, certain stipulations on Self review threats & Advocacy threats in the GN referred to above are speaking a little different language – when auditors perform services that are themselves subject matters of audit (Para 2.1.2) it may land up in Self-review threat. Very similarly, it is apprehended, Advocacy threat may creep in when the auditor promotes, or is perceived to promote, a client’s opinion to a point where people may believe that objectivity is getting compromised ( Para 2.1.3 ).
If the assignment is only imparting knowledge of Ind. AS leaving to the management to take a policy decision on each issue, possible it may not land up in self-review threat but a study is required to take a call for which some Guidance from ICAI will be more relevant.
Management services on item (h) above:
Section 144(h) of the Companies Act, 2013 has used the words “management’s services” as one of the non-admissible services to be performed by the auditor But, if we visit section 2(2)(iv) of the Chartered Accountants Act, 1949 read with Regulation 190A have the phrase “management consultancy and other services”. Chartered Accountants Regulations, 1988:
Management Consultancy & Other Services or MCS means are those services permitted by the Council in pursuance to Section 2(2) (IV) of the Chartered Accountants Act, 1949. The expression “Management Consultancy and other Services” shall not include the function of statutory or periodical audit, tax (both direct taxes and indirect taxes) representation or advice Concerning tax matters or acting as liquidator, trustee, executor, administrator, arbitrator receiver, but shall include the entire range of managements policy determination;: as appears at pages 8-10 of Code of Ethics 2005:
(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) advice 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 counselling 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.
Residuary Clause on item (i) above:
The residuary clause (i) on “any other kind of services as may be prescribed” are also not helpful since are yet to be placed. This cushion is kept for possible addition to the list at a later date when it comes to light based on experience that certain services are to be added to serve the real purpose of the section- on a principle ‘better late than never’
In this regard, attention is invited to the provisions of Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949 which provides that a practicing member shall be deemed to be guilty of professional misconduct……..: “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;” 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.
So long Independence of auditors is under the surveillance and scrutiny of Code of Ethics and under the Chartered Accountants Regulations. But, today when shareholders and stake holders are spread across the globe and that the volume and value of transactions have increased by leaps and bounds in this internet world, the safety of the investors is supreme and the step towards this is the birth of the Section. This is the call of the time and to fall in line with international values, Section 144 has been inserted to raise the level of Independence of auditors to the satisfaction of International Financial Demands. ‘Nip in the bud’ is the slogan or driving motto for the insertion of the Section. By expressly declaring that certain services are not to be done by the auditor in any of the group companies either directly or indirectly as spelt out earlier, the auditing profession will gain the ‘trust of Independence’.
Though the Chartered Accountants Act 1949 as updated, Code of Ethics, the Council’s General Guidance, FAQ&A throw light on the subject, these are primarily issued before the New Act. Therefore, it goes without saying that it is high time ICAI would raise to the call in active cooperation and consultation with MCA to actually come out to decipher what are ‘Management Services’ with practical Frequently Asked Question & Answer model in a columnar table format so as to navigate to achieve the target and the desired results.