Companies not having public interest may be allowed to avail some currently prohibited non-audit services from their auditors

The Company Law Committee has opined that different classes of companies may be permitted to avail differing non-audit services from their auditors.

The Committee recommended that Section 144 of the Companies Act 2013 (CA-13) may be amended to enable the Central Government to prescribe a differential list of prohibitions on availing non-audit services or total prohibition of the same for such class or classes of companies where the public interest is inherent, as may be prescribed.

Section 144 of CA-13 lists certain services that an auditor is prohibited from rendering. This includes services related to accounting, bookkeeping, and actuarial services. In addition to the list of prohibited services, it also empowers the Central Government to prescribe any additional service as a ‘prohibited non-audit service’.

As per Section 147(2), if an auditor performs such services, she shall be punishable with a fine that is not less than twenty-five thousand rupees but may extend to five lakh rupees or four times the auditor’s remuneration, whichever is less.

In 2018, the Committee of Experts on Regulating Audit Firms and their Networks had considered whether auditors, firms and networks should be prohibited from providing any non-audit services to their auditee companies. It took particular note of international practices concerning such services and observed that:

“While section 144 of the Companies Act, 2013 provides an exhaustive list of prohibited non-audit services, it also authorises the government to prescribe any other kind of services in this list. The COE has noted that there could be a case of self-review risk if certain services are allowed to be provided by the auditor. Therefore, there is a need to revisit the list keeping in view the various kind of services rendered by auditors, which can possibly result in conflict of interest.”

The Committee deliberated that while Section 144 allows the Central Government to prescribe non-audit services for one or more companies, there is a strong need to formulate different lists for different classes of companies. It felt that companies that do not have a public interest may avail some of the currently prohibited non-audit services from their auditors. In contrast, companies, where the public interest is inherent, must only avail audit- related services from their auditors, and non-audit services of any kind, directly or indirectly, should be not be rendered by the statutory auditors to the company or its holding, subsidiary or associate company(ies).

In this regard, the Committee took note of the classes of companies for which NFRA has the jurisdiction under Section 132 of CA-13 read with NFRA Rules, 2018, which includes:

“(a) companies whose securities are listed on any stock exchange in India or outside India;

(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;

(c) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;”