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Tax advisories should not be treated as management service: ICAI

New Delhi, Sep 23, 2022

The recommendation comes at a time the government is working on amending the Companies Act to revamp the audit framework

The Institute of Chartered Accountants of India (ICAI) has recommended to the government that tax audits and tax compliance services rendered to a company by its statutory auditor should not be interpreted as a management service, a class of offering they are currently prohibited from rendering.

The recommendation comes at a time the government is working on amending the Companies Act to revamp the audit framework. If ICAI’s recommendation is accepted, it could offer some relaxation in the proposed framework.

At present, the Companies Act prohibits auditors from offering eight specified services including ‘management service’ to the companies they are auditing.

But in the absence of a definition in the law of what constitutes management service, audit regulator National Financial Reporting Authority (NFRA) has been taking the view that tax advisory constitutes management service.

“ICAI’s view has been that tax audits and tax compliance services are not management services. But that is the Institute’s view. NFRA has a different view. The government is examining it and it is now entirely in the government’s domain. ICAI’s view has been communicated to the ministry of corporate affairs," said a person familiar with the discussions between ICAI and the government.

The government’s plan is to prohibit auditors from offering any non-audit service to their audit clients by way of amendments to the Companies Act.

ICAI’s position on this subject also comes against the backdrop of ongoing disputes between some large audit firms and NFRA over what the watchdog regards as a management service that auditors should not offer.

The ambiguity arises because the Companies Act does not define what constitutes a management service.

Audit quality review reports issued by the NFRA shows the regulatory view that in the absence of a definition, management service is to be understood in its literal meaning—that is, services performed by the auditor for the management.

A senior executive of an audit firm said in an interview that tax compliance services are complementary to audits and that they do not in anyway pose a threat to auditor independence.

Emails sent to the ministry and to NFRA on Thursday seeking comments for the story remained unanswered at the time of publishing.

The ministry is currently working on a more rigorous statutory audit framework after an expert panel in March proposed sweeping changes.

Auditors and credit rating agencies come in the line of intense regulatory scrutiny whenever there is a scam or a failure of a systemically important business due to the stress in the economy as regulators and investors expect these corporate governance gate keepers for insights into the affairs of the company that they rate or audit.

[Livemint]

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