Clarity on what constitutes prohibited management services
will help Indian companies and statutory auditors alike.
A statutory auditor audits financial statements that
are prepared by the management of the company. In
doing so, the auditor must act independently.
Regulators such as the Ministry of Corporate Affairs
(MCA), the Institute of Chartered Accountants of
India (ICAI) and the National Financial Regulatory
Authority (NFRA) are all focussed on this aspect.
Undoubtedly, if a statutory auditor, whether directly
or indirectly, provides other services (non-audit
services) to its audit client, conflict of interest
situations could arise. Accordingly, in section 144 of
Companies Act, 2013 (Companies Act) there is a long
list of non-audit services that statutory auditors are
prohibited from rendering, either directly or
indirectly, to their audit client (and some stated
related parties of the audit client). Management
services has been included in the list of prohibited
Ample confusion has been created over management
services due to differing interpretations by ICAI and
NFRA. While NFRA and ICAI may exercise jurisdiction
based on different categories of companies, the term
‘management services’ under section 144 should not
be interpreted differently merely because a company
satisfies the conditions for NFRA jurisdiction to kick in.
From Audit Quality Reports (AQR) published by
NFRA, including one in July 2022, it has become clear
that NFRA interprets ‘management services’ very broadly.
NFRA is effectively taking the view that any service
provided to the management of the concerned
company is to be treated as management services
and consequently a prohibited non-audit service.
NFRA’s current interpretation is not only
inconsistent with international practices but also at
variance with ICAI’s guidance and observations of
the Committee of Experts that was set up by the
Ministry of Corporate Affairs (MCA) in response to
the issues raised by the Supreme Court in the S.
Sukumar Case (Civil appeal No. 2422 of 2018).
“NFRA’s interpretation is in fact so wide that it makes the
list of other prohibited non-audit services almost redundant
given that mostly services are provided to the management
of a company. This has created considerable confusion for
managements and auditors alike. Some clarification of the
term ‘management services’ as used in section 144 of the
Companies Act is therefore imperative”.
ICAI’s understanding of prohibited ‘management
services’ can be derived from the Code of Ethics,
2019, which prohibits the auditor from assuming
‘management responsibility’. ICAI also provides a
detailed list of services that would, in their view,
constitute management responsibilities.
The general theme is that management
responsibilities involve “controlling, leading and
directing an entity, including making decisions
regarding the acquisition, deployment and control of
human, financial, technological, physical and
ICAI’s interpretation is consistent with the views of
the International Ethics Standards Board for
Accountants (IESBA), which is an independent
standard-setting board that develops, in the public
interest, high-quality ethical standards and other pronouncements
for professional accountants worldwide.
IESBA clarifies that providing non-assurance service to an audit
client creates self-review and self interest threats if the auditor (or a network firm)
assumes a management responsibility when performing the service.
IESBA illustrates management responsibilities to
include activities like (a) setting policies and
strategic direction, (b) hiring or dismissing
employees, (c) directing and taking responsibility for
the actions of employees in relation to the employees
work for the entity, (d) authorizing transactions, (e)
controlling or managing bank accounts or
investments, (f) deciding which recommendations
should be implemented, (g) reporting to those
charged with governance on behalf of management.
Hence, even IESBA understands a prohibited
management service as something that involves
assumption of management responsibility, similar to
the themes contained in ICAI’s Code of Ethics.
Interestingly, the Committee of Experts formed by
MCA (which is the administrative ministry for
matters under Companies Act) was also of the view
that prohibited ‘management services’ under section
144 should be those that involve performing
management functions. This is consistent with the
IESBA and ICAI approach to prohibited management services.
Even the U.S. Securities and Exchange Commission
(SEC) which is known to have very strict standards as
far as auditor independence is concerned seems to
prohibit only activities that are normally expected to
be performed by the management of the company
and not any services provided to the management of
A few last words
In addition to NFRA’s interpretation being
inconsistent with tried, tested and established
international standards and those of ICAI, it is also
leading to a scenario where two regulators, NFRA and
ICAI are providing differing interpretations to the
same term, for the same profession, under the same
law (section 144).
Consequently, where NFRA has jurisdiction, it will
interpret ‘prohibited management services’
differently from how ICAI will interpret the same
when deciding in the context of entities where ICAI
has jurisdiction. Pertinently, Section 144 of the
Companies Act makes no such distinction.
The matter of management services seems ripe for
regulatory intervention so that auditors and
companies have the required clarity. Non compliance with requirements
of section 144 of Companies Act impact both the statutory auditor and
the appointing company. Hence, clarity on what
constitutes prohibited management services will
help Indian companies and statutory auditors alike.