No need to further curb 'non-audit' services of auditors: Industry bodies tell govt

NEW DELHI: Opposing any further curbs on 'complementary' non-audit services provided by auditors to companies, several industry bodies have told the government that the existing framework in this regard is adequate and benchmarked with the best global practices.

They have said there are sufficient safeguards in place with regard to the currently permissible non-audit services provided by auditors to their clients and any further restrictions or any addition to the restricted list would increase the cost of services without any corresponding benefit for the audit quality or independence.

The industry bodies have made their submissions in response to a consultation paper floated by the Ministry of Corporate Affairs (MCA), which has proposed significant amendments to existing regulations to enhance independence and accountability of auditors. This comes in the backdrop of several auditors and auditing entities coming under the regulatory lens for alleged misdoings.

While the Companies Act restricts auditors from providing certain specified non-audit services directly or indirectly to the company being audited as also for its holding and subsidiary entities, the MCA has now asked what more non-audit services can be included in the list.

This blacklist presently includes 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 the consultation paper, MCA had noted that some audit firms were following self-regulation and had taken decisions to not take up non-attest work such as consulting and transaction advisory services from listed companies being audited by them.

Calling it "a welcome move" in the midst of auditors facing heat in some high-profile corporate scams, MCA said it has been suggested that more non-audit services could be added to the restricted list as there have been several media reports that the auditors have failed to report material issues with respect to auditee companies and in order to avoid conflict of interest and maintain the independence of the statutory auditors.

The deadline for submission of comments on the consultation paper ended on March 15.

In its submission, the Confederation of Indian Industry (CII) has said the current framework on non-audit services is adequate and is benchmarked with global best practices and therefore it does not recommend adding further restrictions or prohibiting additional services.

For permissible non-audit services, the Companies Act already prescribes obtaining approval from audit committee of a company's board.

The CII, however, has said MCA may consider restricting non-audit services for an audit client with regard to larger companies, such as those covered by NFRA, in the spirit of upholding the trust and credibility of the audit profession and overall capital markets.

NFRA is the National Financial Reporting Authority.

The CII has also sought greater clarity on existing prohibited services, such as "management services", in the absence of any clear guidelines in the matter.

"This would enable companies and the audit committees to better monitor the non-audit services thereby enhancing compliance," CII has said.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has also told MCA that the existing provisions on non-audit services restrictions, fee cap and fee disclosures under various regulations are sufficient to maintain auditor independence and therefore there is no need to restrict more non-audit services for auditors.

It also cited the Institute of Chartered Accountants of India (ICAI) Council General Guidelines, saying they provide that fee charged for non-audit services by the auditor from listed auditee company may not be more than one time the audit fee.

FICCI said the audit committees can rather play a larger role in the approval of non-audit services provided by audit firms or their networks and a robust monitoring and enhanced disclosure mechanism will be more effective.

It has said any additional restrictions may impact capacity building, inhibit skill development, increase cost of services and restrict choice for companies.

"Moreover, there seems to be no tangible benefit on improvement in audit quality or independence," it has said.

The industry body has also said auditors need to have a deep understanding of the company's systems and processes and the impact of various regulatory changes and taxes on the company's financial statements.

Hence, auditors can advise clients in a more efficient manner on various permissible non-audit services like tax compliance, financial due diligence, forensic services, it has added.

CII said it fully supports the concept of a better control and monitoring over non-audit services provided by auditors to audit clients and an enhanced governance will not only help in dealing with potential conflicts but will also dispel perceptions and apprehensions prevailing in the minds of stakeholders and regulators around such independence conflicts.

But, auditors are best placed to provide services like taxation compliance and certain advisory services, due to cumulative business knowledge, without any conflict or violating any independence principles, and therefore any further curbs can increase cost and potential inefficiency without any assurance on audit quality or auditor independence, it said.

CII has said any new restrictions would also impact the synergies that can be drawn by working with one firm for audit as well as essential but complementary/ permitted non-audit services.

Another industry body Amcham has said there is no need to restrict more non-audit services for auditors as the existing provisions for non-audit services restrictions, fee cap, and fee disclosures under various regulations are good enough to maintain auditor independence.