Query No. 1

Subject:  

Engagement  of  a  firm  of  chartered  accountants

non-operator for audit of the operator’s accounts. 1

A.        Facts  of  the  Case

1.    A company,  registered  under  the  Companies Act,  1956,  is  a  non- operating venturer  in a  few  joint  ventures (JVs)  for  oil  exploration and production.  The relationship between the JV partners, both operator and non-operators, is regulated by a Joint Operating Agreement (JOA).

2.  The JOA lays down the privileges, rights, obligations and liabilities of the co-venturers as well as provisions regulating their working relationship. One of the venturers is designated as the operator and others are non-operating venturers.  The operator, by virtue of being designated as the operator, has certain discretionary powers for smooth conduct of the joint operations. The operator is required to maintain accounts for the joint operations.  The JOA provides for audit of the operator’s accounts by the non-operating venturers within a specified time period. According to the querist, as there is no specific clause to  the  contrary in the  JOA, it  is presumed  that  this  audit can  be conducted  by  t he  non -operator ’s  personnel  or  by  its  author is edrepresentatives,  which  may include  a  firm of chartered  accountants.   In addition, there is a provision in the JOA which requires the operator to employ a  qualified  independent  firm  of  internationally  recognised  chartered accountants, registered in India, to audit the Contract Account Books and records of the operator relating to the accounts under the JOA.

3.  Since the formation of these joint ventures about 7-8 years back, the audit  of the  operator’s accounts  by the non-operator is being conducted every year by the company’s own internal audit department.  However, the possibility of engaging a firm of chartered accountants for carrying out audit of the operator’s accounts on behalf of the company (a non-operator) is also being explored.

B . Query

4.  The querist has sought the opinion of the Expert Advisory Committee on the following issues:  

(a)   Whether a firm of chartered accountants which is the company’s statutory auditor, can be engaged by the non-operator for audit of the operator’s accounts and records on behalf of the company. Whether this would amount to the same firm of chartered accountants acting as internal auditor (partly), besides being statutory auditors for the company.  If so, whether the firm can be engaged by the company (a non-operator) for audit of the operator’s accounts and records considering the views expressed by the Company Law Board.  (Reference opinion published in Compendium of Opinions - Vol. I (Third Edition) Query No. 5.11.)

(b)  Whether the same firm of chartered accountants can be engaged both by the operator and non-operator separately for auditing the Contract Accounts Books under JOA (in view of potential conflict of interest).

C.  Points  considered  by  the  Committee

5.    The Committee is of the view that the appointment of a firm of chartered accountants which is the company’s statutory auditors, by the company (a non-operator) for audit of the operator’s accounts and records on behalf of the company, cannot be termed as appointment as internal auditors (partly), since this appointment is a special purpose assignment.  The Committee is, accordingly, of the view that the circular issued by the Company Law Board prohibiting the appointment of statutory auditors as internal auditors does not apply in the present case.  Further, neither law, nor the Code of Ethics of the Institute of Chartered Accountants of India prohibits the appointment of a firm of chartered accountants which is the company’s statutory auditor, by the company (a non-operator) for audit of the operator’s accounts and records on behalf of the company.

6.   With regard to the question as to whether the same firm of chartered accountants can be engaged both by the operator and non-operator separately to conduct the audit of joint venture accounts, the Committee is of the view that there is likely to be a conflict of interest.  This is because the objective of appointment of a firm of chartered accountants by the non-operator is to get assurance from an independent expert that the Contract Accounts Books under Joint Operating Agreement are maintained properly. Accordingly, the Committee is of the view that the same firm of chartered accountants should not be appointed as the auditor by the operator venturer as well as the non- operator venturer separately for auditing the joint venture accounts.

D.   Opinion

7.   On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 4:  

(a)   The firm of chartered accountants which is the company’s statutory auditor, can be engaged by the company (a non-operator) to audit the operator’s accounts and records on behalf of the company. This will not amount to the same firm of chartered accountants acting as internal auditor (partly) besides being the statutory auditor of the company.  

 

(b)  The same firm of chartered accountants should not be engaged both by the operator and non-operator for auditing the Contract Accounts Books under the Joint Operating Agreement in view of the potential conflict of interest.

  ------

 1 Opinion finalised by the Committee on 26.3.2002.