Prohibited Non-audit services by an Auditor under CA 2013 – Can the auditor prepare and file tax returns of the same company?

Traditionally companies have engaged auditors to provide a range of non-audit services. This is because an auditor, due to his continuous engagement with the company, is in a better position to provide these services. Currently, whether non-audit services can be rendered to an audit client is determined by the Code of Ethics and the Guidance Note on Independence of Auditors issued by ICAI. Unlike 1956 Act, the 2013 Act contains specific provisions that prohibit auditors of a company to render non-audit services to an audit client (or its holding company or its subsidiary company).

Prohibited non-audit service includes:

  • 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; and
  • any other kind of services as may be prescribed

The list of the prohibited services is quite wide and not happily worded. A major difficulty has arisen in the interpretation of following clauses:

a)     Rendering of outsourced financial services

b)     Management Services

a)     “Rendering of Financial Services” is no where defined in the Act or the Rules made thereunder. Any of the Services and products provided to consumers and businesses by financial institutions such as banksinsurance companiesbrokerage firmsconsumer finance companies, and investment companies all of which comprise the financial services industry shall be construed as financial services. Though nowhere defined in the Act the term financial services can in no manner be construed in a wider manner and has to be considered in a very stricter sense, as otherwise it would imbibe in its purview every services rendered by a Chartered Accountant.

(b)   “Management Services” –The word management means activities which influence policy or decisions of managerial nature affecting the company as a whole or substantially as a whole. [Commissioner for Corporate Affairs (Vic) v Bracht (1988) 14 ACLR 728 (Aust)]. Broadly the services in relation to  facility, equipment, staffing, contract negotiation, administration, and marketing shall be deemed to be included under the purview of management services. Thus services related with the day to day managerial activities of the Company shall be included under the definition of management services.

But in any case the approval of Board or Audit Committee will be required for engaging statutory auditor for any permitted services. The Section 144 amply clarifies this fact and it will be mandatory for the Company to get the services approved by the Board or its Audit Committee before engaging the statutory auditors for providing any services.

Status of Services Allowed to be rendered by an Auditor under Companies Act, 2013

S.No Services along with Statutory Audit Whether allowed or not Basis
1. Tax Audit , MAT, VAT , Service Tax Allowed Since not included in any of the aforesaid prohibited services hence permitted.Further the code of ethics specifically allows the performance of tax audit alongwith statutory audit as it does not hinders with the independence of the auditor
2. Certification in respect of  say- TUNOVER Certificate, Shareholding, Business running, net worth , 43 B Payment under Income Tax, Debtors agencing to Bank , Assets liability statement  etc  ( or in other words what are not permitted under service tax Allowed Issue of certificate does not fall under any of the prohibited services. 
3. Filling of various returns  (Only filling not preparation) Allowed Since not included in any of the aforesaid prohibited services hence permitted and in no manner be treated as a hindrance to the independence of the statutory auditor.
4. Representation before various Statutory  / Tax authorities in response to notice or for procedural work Allowed As not covered in any of the aforesaid prohibited services and in no manner enters within the bracket of independence of auditor.
5. Filling of correction, revision etc before tax & statutory authority Allowed As not covered in any of the aforesaid prohibited services and in no manner enters within the bracket of independence of auditor
6. Valuation of shares Allowed Valuation of shares does not falls under the list of prohibited services. However the provisions of the Code of ethics have to be followed before undertaking any assignment of valuation of shares if also engaged as a statutory auditor.