The roles of various gatekeepers of corporate governance, such as auditors, independent directors and credit rating agencies, has increasingly come under scrutiny as a response to the various financial scandals that shook corporate India – from Satyam to IL&FS, and more recently, in the case of the auditor resigning from Reliance Capital. While the company’s management is ultimately responsible for ensuring that the accounts give a true and fair view of its state of affairs, its auditors also play a key role in assessing the accuracy and reliability of such accounts.
The auditor-company relationship has potential for conflicts of interest, where the former is providing more lucrative non-audit services (NAS) to a company that it audits, which could compromise its independence, and by extension, the quality of its audit. The Companies Act, 2013, has addressed these issues to some extent by prohibiting auditors from providing services such as internal audit, accounting, investment advisory and investment banking to an audit client (including its holding and subsidiary companies). Firms are, however, free to offer NAS such as tax and unspecified advisory services with the approval of the company’s board of directors or the audit committee of the board, as applicable.
Recent news reports indicate that the Ministry of Corporate Affairs is considering tightening the NAS-related rules further, including expanding the list of prohibited NAS and capping revenues from NAS.
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Rachael Israel is a partner and Jagriti Mohata is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.
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