1.13 Query
Whether a statutory auditor of a company should accept another assignment on retainership basis from the company
1.‘A’ is the statutory auditor of a private limited company, which is engaged in the export of handloom fabrics, carpets and other Indian handicrafts to various foreign countries. The company has recently been incorporated and the financial accounting system has yet to be set up.
2.The querist has sought the opinion of the Expert Advisory Committee as to whether it is professionally ethical for the statutory auditor of the abovementioned private limited company, to charge professionally for accountancy services/liaison services with export authorities/any other professional services, from month to month, on retainership basis.
Opinion May 26, 1987
1.The Committee notes that in para 3 of the ‘Statement on Payments to Auditors for Other Services’, issued by the Institute of Chartered Accountants of India, an illustrative list has been given in respect of other services which might be usefully rendered by an auditor of a company against payment of additional fees as below:
“(a) Taxation Representation before the Tax Authorities and Tax Planning and Advisory Services.
(b) Management Services- These may include advice on the installation of a costing or budgetary control system, management information system, selection of Senior Personnel in the Finance Department etc.
(c) Company Law Services-Advice in relation to compliance with the various provisions and procedures under the Companies Act.
(d) Investigation of accounts for various purposes, e.g., in case of purchase of business, suspected fraud etc.
(e) Advice in connection with amalgamation and merger schemes, schemes of reconstruction and reorganisation, etc.
(f) Valuation of Shares of Limited Companies for various purposes.
(g) Issue of Certificate as required by Government and other authorities for various specific purposes, for example:
(i) Certificates required by the Reserve Bank of India for Exchange Control purposes.
(ii) Certificate of Gross Profit and available surplus under the Payment of Bonus Act.
(iii) Certificates of consumption of raw materials, production, exports, etc. required by the Joint Chief Controller of Imports.
(iv) Certificates at the specific request of lending Institutions, both National and International.
(v) Certificates based on verification of financial records to various Government, public and other authorities.
(h) Special assignment required by a company for its own benefit for example, a surprise verification of cash or inventories or surprise visits to branches under special circumstances.
(i) Review of systems and procedures and of the internal controls, particularly in relation to cash transactions, purchases made by the Company, inventories, sales effected by the company, etc. Such a review is followed by recommendations for improvement in the systems and procedures and in the internal control for the benefit of the company. (j) Audits of ancillary institutions of the Company like the employees’ Provident Fund etc., in respect of which usually the fees are paid by the Company itself.”
2.The Committee also notes that the Council of the Institute of Chartered Accountants of India, has defined the expression “Management Consultancy Services”[1], which can be provided by a chartered accountant in practice, as below:
“the expression “Management Consultancy Services” includes financial planning and financial policy determination, capital structure planning and advice regarding raising of finance, preparing project reports and feasibility studies, preparing cash budgets, fund flow statements, profitability statements, capital and revenue budgets, organisation, planning and cost control, inventory management, price fixation, personnel selection, management audits, job description and job evaluation, setting up incentive plans, control methods and management reporting and advice regarding amalgamations and mergers.”
3.The Committee notes that providing liaison services as such does not specifically appear in the list of other services and the management consultancy services (given in the above paragraphs). The Committee is therefore of the opinion that the Chartered Accountant or statutory auditor in question cannot provide liaison services with export authorities unless such services are connected with his professional work in this regard, such as, certification or representation work for submission to such authorities.
4. The Committee notes that the Council of the Institute of Chartered Accountants of India, at its 113th meeting, held on 11th to 13th April, 1985, decided as below:
“A reference was received from the Department of Company Affairs that it might not be ethical on the part of a statutory auditor to simultaneously render accounting services to his client company. The Council considered the matter and came to the conclusion that the practice of the statutory auditor of a company writing the books of account of the company or compiling the same, deserves to be discouraged.”* The Committee is therefore of the opinion that the statutory auditor of the company should not render accountancy services to that company.
5. With regard to charging of monthly fees by the statutory auditor of the company for other services on retainership basis, the Committee notes that there is no specific prohibition in the Chartered Accountants Act, 1949, the Regulations, and the relevant pronouncements made by the Institute in this regard. The Committee is of the opinion that inspite of such lack of express prohibition, the auditor must ensure that acceptance of the said assignment does not impair his independence to functions as the auditor. This may be decided by the auditor keeping in view a number of factors, the most important being, the nature of contract whether the assignment, in fact, is nothing but in the nature of employment including part-time employment. If this be the case, the statutory auditor should not accept the said assignment. In other words, the Committee is of the opinion that the auditor will have to decide, keeping in view the facts and circumstances of the case, whether he should or should not accept this assignment so that his independence is not impaired. ______________________________ [1] CICA Newsletter, November 1976, p. 119. * Published in the July, 1985 issue of ‘The Chartered Accountant’ at page 40.
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