Question

Case Data: Smit & Ng Chartered Accountants

You are a junior manager at Smit & Ng, a firm of Chartered Accountants. You are responsible for reviewing ethical matters which arise with the firm's portfolio of clients. During recent investigations you identified the following matters:

(a) Medina Co

Until recently, your firm has provided a range of non-audit services to Medina Co including bookkeeping, payroll and tax computation and advice. Medina Co recently obtained an offer for a significant amount of finance to help the company grow. The management of Medina Co has ambitious plans for growth which they believe will result in revenue doubling within one year and then continuing to grow at a similar rate for at least the next five years. In order to secure the funding, the directors decided to have the financial statements audited and requested three audit firms (including Smit & Ng) to tender for the audit engagement.

After a rigorous tender process, it was announced at the beginning of March by Medina Co that Smit & Ng was successful in securing the audit engagement and will audit the financial statements of Medina Co for the year ending 30 June 2020, as well as continuing to provide the existing services.

At a social gathering last week, the audit partner, Steve Warner, confided to you that he “lowballed” on their tender for the audit so that the firm could continue providing other lucrative services to Medina Co.

Require:

Identify and discuss the ethical and other professional issues found in the above case.

Answer 1

As per Sec 144 of Companies Act 2013,

(i) In case the auditor is an individual:

Rendering of services either by himself or through his relative or any other person connected or associated with him through any other entity, whatsoever, in which such individual has significant influence or control or whose name or trademark or brand is used by such individual.

(ii) In case the auditor being the firm:

The services rendered by itself or through any other of its partners or its parent, subsidiary or associate entity or through any other entity, whatever may be the case where the firm or any partner of the firm has significant influence or control or whose name or trademark or brand is used by the firm or any of its partners.

The list of restricted services are:

(a) accounting and book keeping services;

(b) internal audit;

(c) design and implementation of any financial information system;

(d) actuarial services;

(e) investment advisory services;

(f) investment banking services;

(g) rendering of outsourced financial services;

(h) management services; and

(i) any other kind of services as may be prescribed.

Not only this but also the newly inserted section 144 talks about the time allowed to leave the restricted services by the auditors which goes like this:

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 first financial year after the date of such commencement.

Also, according to Chartered Accountants act 1949 Council general guidelines 2008, prohibits a Statutory auditor of the company to provide Non audit Services.

In the given case as Smit & NG provides Statutory audit services to Medina Co. and it is also wants to provide Non Audit Services which is in contrary to the provisions of Sec144 of Companies Act 2013 and also unethical as per Guidelines issued by Institute of Chartered Accountants of India.

So Smit & NG cannot provide non audit services as it is appointed as statutory auditor of the company