Firms auditing the accounts of public-interest entities such as listed or large unlisted companies could be debarred from providing non-audit services to them.
Government sources said they were considering this move, which would improve corporate governance and address conflicts of interest that arose when the same firm provided audit and non-audit services to a company.
This will, however, require a change in the Companies Act. The corporate affairs ministry could push for this change in the next round of amendments to company law, according to a senior official.
“While providing audit services, the same firm should not also be involved in management consultancy or fundraising activities,” the official added.
The Companies Act gives a list of non-audit services, which include accounting, book-keeping, internal audit, and actuarial and management services.
WHAT ARE NON-AUDIT SERVICES
- 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
Source: Section 144 of Companies Act 2013
“These services are vague. One interprets them suiting one’s own purpose. For instance, what are management services? They are not defined and audit firms can use the term to mean what works out best for them,” a senior company lawyer said.
In February last year, PriceWaterhouse India and Deloitte Haskin and Sells and its network firms had decided to give up offering non-audit services to public interest entities they audit here.
Deloitte had said it would not provide non-audit services to listed companies and other entities where public money was involved, such as banks and insurance companies, if they were its audit clients.
The PwC network of firms had stopped providing non-audit services to Indian audit clients governed by the National Financial Reporting Authority (NFRA).
Grant Thornton India LLP is another audit firm that took the same call. Experts have said there was pressure from stakeholders to keep audit and non-audit at arm’s length.
With the auditing profession under the scanner and two of the big four firms (the other two being KPMG and Ernst & Young) stopping non-audit services for audit clients, there is pressure on the way audit companies function.
A recent consultation paper by the corporate affairs ministry has raised concern over the issue of remuneration, which is decided by the management of the company.
“Reliance on clients’ fees may affect the independence of an auditor,” the paper said.