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Auditors independence: No need for clarification on management services, says NFRA Chair Ajay Bhushan Pandey

Sep 11, 2023

The auditor should always be alert to the possibility of fraud and material misstatements and accordingly perform various parts of the audit, Pandey says.

There is no requirement for clarification on what constitutes management services, said Ajay Bhushan Pandey, Chairperson at the country’s independent audit watchdog, National Financial Reporting Authority (NFRA), stressing that the existing regulation is quite clear.

Auditors should not make a narrow and convenient interpretation of the provisions of the law, he said in an exclusive interaction with ETCFO while discussing his take on their independence.

NFRA’s chair remarks came in the backdrop of certain sections of the industry wanting clarification on the definition of management services. Management services is one of the non-audit services prohibited in the Companies Act, 2013, for auditors as to ensure their independence which may otherwise get compromised if they provide such non-audit services, as then they may be conflicted to ask questions to the management. Below are edited excerpts from the interaction:

Q: What are your views on auditor independence?

Ajay Bhushan Pandey: The Standards of Auditing (SAs) prescribed under the Companies Act, Code of Ethics and the Act itself lay down some important and fundamental requirements on the financial interests of auditors and restrictions on rendering non–audit services. Auditors should be independent both in appearance as well in mind.

The Code of Ethics mentions that auditors need to address various threats including that of self-review threat (the self-review affects the independence of the auditor if the auditor is auditing his or her own work or work that is done by others in the same firm). Then there are other threats as well like intimidation, advocacy, familiarity, self-interest, etc, that the auditors need to address. Auditor independence needs to be seen from this perspective.NFRA Chair Ajay Bhushan Pandey

So, auditors independence is the key. If the auditor is not independent—if the auditor has some links directly or indirectly where consultancy or other kinds of assignments are done for the company, obviously, the auditor will not be so independent in performing his task and would be hesitant in challenging many of the management assertions and management figures, which he is legally bound to do because the fundamental tenet of audit is that the auditor should display professional scepticism (SA 200) and challenge management assertions.

Also, the auditor should always be alert to the possibility of fraud and material misstatements and accordingly perform various parts of the audit.

Let us remember the auditor’s role is a critical public interest duty and para 3 of SA 200 clearly says the purpose of an audit is to enhance the degree of confidence of intended users of financial statements.

Q: A government panel back in 2021 (The Company Law Committee) was in favour of reviewing the current framework of non-audit curbs for auditors to improve independence. What is NFRA’s standpoint?

Ajay Bhushan Pandey: Suggestions to review and improve the existing framework (of non-audit curbs for auditors) can always be considered but at this point in time, we feel the focus should be on applying accounting and auditing standards, quality control standards, and code of ethics in true letter and spirit.NFRA Chair Ajay Bhushan Pandey

So, while there always remains scope for improvement, it should not happen that in the hope of bringing out changes in the current norms, it adversely impacts the basic structure of the audit required to protect the public interest.

Q: One of the prohibited services for auditors in the regulation (Section 144, Companies Act, 2013) is “management services”. Some veteran auditors have been calling for a clarification by the regulator in respect of what constitutes management services. Is there a clarification required?

Ajay Bhushan Pandey: We don’t feel there is a need for clarification. The law and the standards are clear on the definition of management services. They say that if auditors are providing services that impact their independence they should not undertake assignments, whether permitted or not. It is important not to make narrow and convenient interpretations of these terms which are intended to achieve a larger public interest goal.

Auditors should not look only at the Companies Act, 2013 but also at the Code of Ethics and the Standards of Auditing to decide whether their independence is hindered if they undertake non-audit services.

Section 144 of the Companies Act says that the statutory auditor should not directly or indirectly render any prohibited non-audit service to an audit client and the code of ethics also mentions certain threats that auditors have to address. If the auditor himself or some of his associate entities, which may be part of a network or an alliance, does some non-audit work for a fee multiple times the audit fee that the auditor is receiving, is it not a case of auditor independence getting compromised?NFRA Chair Ajay Bhushan Pandey

While we can look at international practices in similar areas we need to be cautious of our specific domestic laws and regulations as to why such special terms are used here.

Also, one should learn from events around the world and the latest developments, for example, see the stringent norms coming to the UK about the operational separation of audit and non-audit divisions in large audit firms, arms-length pricing of professional services between these two divisions, limits on the income sharing pool of audit partners, etc.

That’s why we said auditors should not make a very narrow and convenient interpretation of the provisions of the law.


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