Services an Auditor Cannot Render: Section 144

The services an auditor cannot render to a company it audits are listed in section 144 of the Companies Act, 2013. Nine heads are named, the bar follows the service through the group, and an Explanation reaches the relatives, partners and affiliated entities that would otherwise be the obvious way around it. This is the Act's audit independence rule, and it is more mechanical than it looks.

What are the services an auditor cannot render?

The section states the permission and the prohibition in one sentence. An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company), or its holding company or subsidiary company, and then names them.

The nine heads follow, as printed:

Clause (i) is open ended, so the list can grow by rule without the section changing. Everything outside the nine heads still needs approval from the Board of Directors or the audit committee before the auditor may provide it. The committee that gives that approval in a listed company is described in audit committee section 177.

Why does clause (b) bar the auditor from internal audit?

Because the statutory auditor would otherwise be reviewing work its own side had done. Section 138 requires a prescribed class of companies to appoint an internal auditor, who may be a chartered accountant or a cost accountant or another professional the Board decides on. Clause (b) of section 144 keeps that appointment away from the statutory auditor. The requirement itself is set out in internal audit under section 138.

The same separation appears in the enforcement provisions. Where the National Financial Reporting Authority proves professional or other misconduct, section 132(4)(c) lets it debar a member or firm from being appointed as an auditor or internal auditor, and separately from performing any valuation under section 247. NFRA's powers are covered in NFRA and the National Financial Reporting Authority.

How far does directly or indirectly reach?

Further than most readers expect, and the Explanation spells it out rather than leaving it to inference. It has two limbs, one for an individual auditor and one for a firm.

For an individual, the term includes rendering of services either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual.

For a firm, it includes rendering of services either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.

Two tests recur in both limbs and neither depends on ownership alone. The test of significant influence or control catches a structure without a shareholding, and the test of whose name or trade mark or brand is used catches a network member that shares branding without common ownership. That second test is the one that reaches a member firm of an international network.

What about services an auditor was already providing?

The proviso handles the transition. It provides that an auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement. That was a one time runway on the Act coming into force, not a continuing grace period for a newly appointed auditor.

Section 144 sits inside a chapter built around keeping the same firm from getting too close. The tenure limits are in auditor rotation section 139, the exit route before term is in auditor removal section 140, and the duty that runs the other way, to report fraud the auditor finds, is in auditor fraud reporting section 143.

For an investor, the services an auditor cannot render matter because non-audit fees are disclosed. Where a company's payments to its auditor are large relative to the audit fee, section 144 is the provision against which the composition of that number should be read.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.