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Non-audit services: NFRA to crack down on Big 4, others

February 12, 2024

Auditors, including the Big Four, may come under stringent scrutiny by the National Financial Reporting Authority (NFRA) for providing “non-audit services” to the same clients of which they are the statutory auditors, according to people privy to the regulator’s plans.

The NFRA’s move to evaluate the practice with a critical eye could, however, spark a fresh row, as the legal grounds of its action are seen to be contentious. Also, the Institute of Chartered Accountants of India’s (ICAI) guidance note, which complies with the norms of International Federation of Accountants, is rather lenient on this aspect.

Currently, every auditor – independent or with an auditing firm – has to follow a code of ethics defined by the ICAI, but non-audit work isn’t prohibited under the code.

Of course, Section 144 of the Companies Act 2013 doesn’t allow statutory auditors to render a handful of services such as internal audits, actuarial, investment banking/advisory, management, outsourced financial services, book keeping services, etc. to their clients. However, there are plenty of other services that they can offer to their clients and their subsidiaries, including administrative, consultancy, forensics, fact-finding, diligence services, etc.

However, the NFRA could draw power to regulate rendering services other than listed under Section 144, by invoking an entry that suggests prohibition could be extended to “any other kind of services as may be prescribed”.

“A client can come up with hundreds of demands. The accountants have to do the assessment, and evaluate the work offered to them so that it doesn’t threaten their independence. This is where it gets tricky because the regulator can arbitrarily find some or all of those non-audit services problematic due to the conflict of interest with the statutory audit job or for some other reasons,” said a partner with a leading audit firm who didn’t wish not to be identified.

Nearly all large audit firms – Deloitte India, PwC, EY India, Grant Thornton, KPMG India etc. – refrain from providing non-audit services to the listed entities for which they are statutory auditors, as an act of extra vigilance and in order to safeguard their reputation. But they are not as circumspect when it comes to rendering such services to unlisted firms. “The NFRA’s move, if correct, would make the work of auditors difficult. It might be tantamount to over-regulation, as it goes beyond internationally accepted practice,” said Ved Jain, noted chartered accountant and former president of ICAI.

Typically, many of the non-audit services are lucrative for the audit firms, while auditing per se may not invariably be very profitable, given the high costs involved. “The idea is to desist from performing only those management services for the firms, which they are supposed to undertake themselves. For instance, GST paperwork,” said Jain.

The ICAI’s 20-page guidance note on “Independence of auditors” states that independence is “a very subjective matter.” “One person might be independent in a particular set of circumstances, while another person might feel he is not independent in similar circumstances,” as per the note.

“Inspecting the non-audit work is a favourite area for NFRA. All the five inspection reports issued by NFRA last year have cited issues with non-audit work offered by the audit firms or related entities,” said founder of an accounting firm, on condition of anonymity.

NFRA, which was formed in 2018, has been busy issuing orders against auditors involved in professional misconduct. It’s also conducting inspections on large firms to find lapses in their existing practices, and making them take corrective measures.

[The Financial Express]

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