The government will prevent chartered accountants (CAs) from offering consultancy and advisory services to the companies which hire
them for auditing their accounts. This is being done to lend greater credibility to company accounts.
The statutory auditors, who vet the financial accounts of a company, will be restricted from providing their corporate clients services such as investment management, actuarial services and investment banking.
The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services.
Under the guidelines proposed in the new legislation, statutory auditors will also be prohibited from providing services like design and implementation of financial information system, investment advisory, rendering of outsourced financial work and management services.
The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements.
The proposal seeks to place specific restrictions on the services which a chartered accountant, acting as a statutory auditor, can provide for his client, says Institute of Chartered Accountants of India president Ved Jain, adding the proposal will help avoid conflict of interests.
The move may come as a major damper for many practising CAs who have been providing audit as well as consultancy services for their clients.
According to Ernst and Young India director Rahul Roy, the proposal can lead to a great shakeup within the accounting profession. He, however, agreed that the move is in line with globally followed practices.