Permissible and Non-permissible services by CA in practice

For NIRC of ICAI

By CA C.N.Vaze

16^th June,2022

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Fundamental Principles of Ethics

Five fundamental principles of ethics for professional accountants:

• Integrity – to be straightforward and honest
• Objectivity – not to compromise professional judgements because of bias
• Professional Competence and due care – to attain and maintain professional knowledge and to act diligently
• Confidentiality – to respect the confidentiality of information acquired
• Professional behavior – to comply with relevant laws and regulations

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Threats to compliance with the fundamental principles

• Self – interest threat - the financial or other interest will inappropriately influence a professional accountant’s judgement or behavior.

e.g. auditor has only one client or one client represents a significant proportion of his business

• Self – review threat – activity performed by the accountant within the accountant’s firm or employing organization, on which the accountant will rely when forming a judgement

e.g. external auditor performing accounting work of the firm

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• Advocacy threat – to promote a client’s position to the point that the accountant’s objectivity is compromised

e.g. Promoting client’s newly issued shares in the market, Acting as an advocate for an assurance client in litigation or dispute with third parties

• Familiarity threat – sympathy or easy acceptance of work due to long or close relationship with client.

e.g. If auditor is a childhood friend of finance manager of company

• Intimidation threat – when a professional accountant is deterred from acting objectively because of perceived pressures

e.g. being threatened with dismissal or replacement of client engagement

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Evaluating threats

• Decide whether the identified threat is at an acceptable level.
• Acceptable level is a level at which a professional accountant conclude that he complies with the fundamental principles.
• Factors relevant in evaluating the level of threats:
• Corporate governance requirements
• Educational, training and experience requirements for the profession
• Effective complaint systems enabling attention to unethical behavior
• Professional or regulatory monitoring and disciplinary procedures
• Consider new information or changes in facts and circumstances

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Addressing threats

The accountant shall address the threats by eliminating or reducing them at an acceptable level. This can be done by –

• Eliminating the circumstances, including interests or relationships, that are creating the treats;
• Applying safeguards, where available and capable of being applied to reduce threats to an acceptable level;
• Declining or ending the specific professional activity

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Provision of Non-assurance services to an Audit client�

As per Section 144 of the Companies Act 2013, “an auditor appointed under the Companies Act 2013 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 or subsidiary company), namely:-

• 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:

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Provided 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.

Explanation.—For the purposes of this sub-section, the term ―directly or indirectly‖ shall include rendering of services by the auditor,—

(i) in case of auditor being an individual, 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;

(ii) in case of auditor being a firm, 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.

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Management Responsibility

A firm shall not assume a management responsibility for an audit client or to the holding or subsidiary company of such client.

Activities that would be considered a management responsibility include:

• Setting policies and strategic direction.
• Hiring or dismissing employees.
• Directing and taking responsibility for the action of employees in relation to the employees’ work for the entity.
• Authorizing transactions.
• Controlling or managing bank accounts or investments.

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• Deciding which recommendations of the firm or network firm or other third parties to implement.
• Reporting to those charged with governance on behalf of management.
• Responsibility of – Preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.
• Responsibility of designing, implementing, monitoring or maintaining internal control.

Therefore, these activities are not permissible.

However, providing advice and recommendations to assist the management of an audit client in discharging its responsibilities is not assuming a management responsibility. Hence, these services can be rendered to the management.

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Services to certain related entities�

A firm may assume management responsibilities or provide certain non-assurance services that would otherwise be prohibited to the following related entities of the client on whose financial statements the firm will express an opinion:

1. An entity that has direct control over the client (other than an engagement to which Companies Act,2013 applies);
2. An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity; or

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c) An entity which is under common control with the client, provided that all of the following conditions are met:

1. The firm or a network firm does not express an opinion on the financial statements of the related entity;
2. The firm or a network firm does not assume a management responsibility, directly or indirectly, for the entity on whose financial statements the firm will express an opinion;
3. The services do not create a self-review threat because the results of the services will not be subject to audit procedures; and
4. The firm addresses other threats created by providing such services that are not at an acceptable level.

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Services provided by Auditor

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Management consultancy and other services

• Background – To empower the members to face the challenges in the service sector and to equip for the opportunities in the non-audit service area
• The council at its 261^st meeting has decided to allow members in practice to render Management Consultancy and Other services in corporate form, subject to the guidelines issued by the Institute

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Type of services included in Management Consultancy and other services

• Financial management planning and financial policy determination.
• Capital structure planning and ad- vice regarding raising finance
• Working capital management
• Preparing project reports and feasibility studies
• Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds etc.
• Budgeting including capital budgets and revenue budgets.

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• Inventory management ,material handling and storage.
• Market research and demand studies.
• Price-fixation and other management decision making.
• Management accounting systems, cost control and value analysis
• Control methods and management information and reporting.
• Personnel recruitment and selection.

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• Setting up executive incentive plans, wage incentive plans etc.
• Management and operational audits.
• Valuation of shares and business and advice regarding amalgamation, merger and acquisition.
• Business Policy, corporate planning, organisation development, growth and diversification
• Organisation structure and behaviour, development of human resources including design and conduct of training programmes, work study, job- description, job evaluation and evaluation of work loads

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• Systems analysis and design, and computer related services including selection of hardware and development of software in all areas of services which can otherwise be rendered by a Chartered Accountant in practice and also to carry out any other professional services relating to EDP
• Acting as advisor or consultant to an issue, including such matters as:
• Drafting of prospectus and memorandum containing salient features of prospectus. Drafting and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of Companies and SEBI.
• Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the underwriting arrangement,

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distribution of publicity and issue material including application form, prospectus and brochure and deciding on the quantum of issue material (In doing so, the relevant provisions of the Code of Ethics must be kept in mind). �

c) Advice regarding selection of various agencies connected with issue, namely Registrars to Issue, printers and advertising agencies.

(d) Advice on the post issue activities, e.g., follow-up steps, which include listing of instruments and despatch of certificates and refunds, with the various agencies connected with the work. CODE OF ETHICS 180 Explanation: For removal of doubts, it is hereby clarified that the activities of broking, underwriting and portfolio management are not permitted.

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• Investment counseling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of Ethics must be kept in mind)
• Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the relevant provisions of the Code of Ethics must be kept in mind)

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• Quality Audit
• Environment Audit.
• Energy Audit.
• Acting as Recovery Consultant in the Banking Sector.
• Insurance Financial Advisory Services under the Insurance Regulatory & Development Authority Act, 1999, including Insurance Brokerage.

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Type of services not included in Management Consultancy and other services

• Statutory or periodical audit
• Tax (both direct taxes and indirect taxes) representation or advice concerning tax matters or acting as liquidator, trustee, executor, administrator, arbitrator or receiver

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Permissible services under clause (11) of Part I of the First schedule of the Chartered Accountant’s Act,1949

• Director Simplicitor – who is not a Managing or Whole time director
• Promoter/Promoter-Director
• To acquire interest in family business in any manner
• As a proprietary firm
• As a partnership firm
• In the name and style of HUF as its Karta or a member

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Conclusion

• There may not be ‘Yes’ or ‘No’ type answers to many specific questions.
• One has to be guided by one’s conscience and use one’s discretion.
• Further, whenever there is a threat perceived, there must be a note in our working papers as to what safeguards have provided.
• We need to be careful while accepting any assignment where our independence is likely to be questioned.

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Thank you

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