Auditors to come under stringent scrutiny of NFRA for providing non-audit services to Audit Clients

In the recent development, all Non-audit work will now come under NFRA radar. The Auditors will face stringent scrutiny of NFRA for providing non-audit services to Audit Clients.

However, they can provide a wide range of other services to clients and their subsidiaries, such as administrative, consultation, forensics, fact-finding, and diligence services.

However, the NFRA could exercise its authority to regulate delivering services other than those named in 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 make hundreds of demands. The accountants must review and evaluate the task assigned to them so that it does not jeopardise their independence. This is where things get complicated because the regulator can deem some or all of those non-audit services problematic owing to a conflict of interest with the statutory audit job or for other reasons,” said a partner with a major audit firm who did not want to be identified.

Almost all prominent audit firms, including Deloitte India, PwC, EY India, Grant Thornton, and KPMG India, refrain from providing non-audit services to listed entities for which they are statutory auditors in order to maintain extra vigilance and protect their reputation. However, they are not as cautious when providing such services to unlisted companies.

“If the NFRA’s decision is correct, it will make auditors’ jobs more difficult. It may be considered overregulation because it exceeds internationally accepted practice,” said Ved Jain, a famous chartered accountant and past president of the 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 goal is to stop providing management services to enterprises that they are supposed to do on their own. For example, GST paperwork,” Jain explained.

The ICAI’s 20-page guidance note on “Independence of auditors” argues that independence is “a very subjective matter.”

“One person may be independent in a specific set of circumstances, while another may believe he is not independent in similar circumstances,” the note states.

“NFRA particularly enjoys inspecting non-audit work. “All five inspection reports issued by NFRA last year cited issues with non-audit work offered by audit firms or related entities,” claimed the founder of an accounting firm, who requested anonymity.