Indian Government to Tighten Rules on Statutory Audit

The Corporate Affairs Secretary, Injeti Srinivas said that the government is planning to put more restrictions on the audit firms accepting non-audit assignments from clients. This initiative has been taken to develop the quality of statutory audit.

Srinivas said in an interview, “The ministry of corporate affairs and the National Financial Reporting Authority have been assessing how the quality of audit can be further improved and whether the list of non-audit services that auditors are barred from accepting should be widened in order to prevent a conflict of interest.”

The idea behind this step is to make sure that auditors do not compromise in giving a fair and true picture of the financial health of the company.

The Companies Act, 2013 does not allow auditors from offering eight specific services directly or indirectly to their clients, which includes internal audit and actuarial and investment banking services. The statutory auditors are also barred from offering such service to an entity’s parent or subsidiary.

But, there are other services which are not included in this list such as secretarial services, tax audits, mergers and acquisitions advisory, and transfer pricing-related services. The auditors are free to offer these services to the clients.

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Audit firms can also use other companies in their network for non-audit services. But according to an industry executive, a network partner firm offering non-audit services could give rise to a conflict of interest to the audit firms.

The move to scrutinise audit firms comes in the wake of the collapse of Infrastructure Leasing and Financial Services Ltd. (IL&FS) and the investigation by several agencies on the directors of the company, statutory auditors, and the rating agencies.

IL&FS defaulted on payments, which prompted a liquidity crisis in the non-banking financial sector and led to a negative impact on the real estate industry and SMEs.

In June 2009, the Satyam Computer Services Ltd. scam gave rise to the new Companies Act of 2013. Due to this Rs 7,000 crore scam, class action suits were introduced in the Act and the efforts to loosen the corporate laws were dropped.