Companies Act Section 144

Companies Act Section 144 Prohibition on Auditors Rendering Certain Services to Audited Companies

Section 144 of the Companies Act establishes clear boundaries on the services that statutory auditors of a company are permitted to provide. The section ensures that auditors maintain independence and avoid any conflict of interest arising from offering non-audit services to the same company they audit. The intention behind this provision is to safeguard the objectivity, impartiality, and professional skepticism of auditors, who must perform their duties in the best interest of shareholders, creditors, and the larger public.

Scope and Applicability

This section applies to every auditor who has been appointed under the Companies Act to conduct the statutory audit of a company’s financial statements. It also applies to the audit firm if the appointment is made to a partnership firm or LLP. The restrictions mentioned do not apply solely to the company being audited but extend to its holding company and subsidiary companies as well.

Permitted Services- Subject to Approval

The auditor is permitted to render certain non-audit services to the company, provided such services have been specifically approved by the company’s Board of Directors or, where applicable, by the Audit Committee. However, even with such approval, the auditor must refrain from offering certain prohibited services that are expressly restricted under this section.

Prohibited Services - Complete Ban on Certain Services

An auditor, whether acting directly or indirectly, is strictly prohibited from providing any of the following services to the company, its holding company, or its subsidiary company:

(a) Accounting and Book-keeping Services

This includes preparing the company’s financial records, maintaining ledgers, preparing journal entries, and assisting with bookkeeping functions. These services could impair the auditor’s independence, as they would be reviewing work they themselves performed.

(b) Internal Audit Services

Internal audit involves the evaluation of internal controls, risk management processes, and governance structures. It is considered incompatible with statutory audit responsibilities, which involve providing an independent external opinion.

(c) Design and Implementation of Financial Information Systems

This restriction includes developing, customizing, or setting up financial software, accounting platforms, or internal control systems, as the auditor would effectively be reviewing their own work.

(d) Actuarial Services

Any services that involve actuarial valuations, assumptions setting, liability modeling, or risk analysis would be prohibited to avoid a conflict of interest where the auditor might be auditing their own projections.

(e) Investment Advisory Services

Auditors are barred from offering investment advisory services, including recommending investment strategies, asset allocation, or specific securities to invest in. This avoids the risk of auditors having financial interests in the company’s investments.

(f) Investment Banking Services

Auditors cannot provide services like underwriting securities, assisting in raising capital, performing business valuations for mergers and acquisitions, or advising on financing strategies, as these create potential conflicts.

(g) Outsourced Financial Services

The auditor must not offer outsourced services related to financial management, accounts processing, payroll management, or similar financial functions.

(h) Management Services

The auditor cannot act as a management consultant providing advice on operational improvements, business strategy, or organizational restructuring. Such advisory roles compromise the auditor’s independence.

(i) Any Other Services as may be Prescribed

The Central Government has the authority to prescribe additional restricted services that would be inconsistent with the auditor’s duty to provide an objective and unbiased audit opinion.

Transition Period for Existing Non-Audit Services

For auditors or audit firms who were already providing any of the prohibited non-audit services before this section came into force, a grace period is provided. They are required to cease offering these services to the company, holding company, or subsidiary company by the end of the first financial year after the commencement of this provision. This ensures a smooth transition and provides time for companies to seek alternative service providers for such non-audit work.

Clarification on “Directly or Indirectly” Offering Services

To prevent circumvention of these restrictions, the law also defines what constitutes providing services "directly or indirectly." This ensures that auditors cannot evade the restrictions by offering prohibited services through relatives, affiliates, or related entities.

(i) In case the auditor is an individual

The prohibition extends to services rendered:

By the auditor personally,

By any of his/her relatives,

By any person connected or associated with the auditor,

By any entity in which the auditor holds significant influence or control,

By any entity using the auditor’s name, trademark, or brand.

(ii) In case the auditor is a firm

The prohibition extends to services rendered:

By the audit firm itself,

By any of its partners,

By its parent, subsidiary, or associate entities,

By any other entity in which the firm or any partner holds significant influence or control,

By any entity using the firm’s name, trademark, or brand.