The National Financial Reporting Authority (NFRA) is set to intensify its scrutiny of auditors, including major firms such as the Big Four, for providing “non-audit services” to the same clients they are responsible for auditing. This move is likely to stir controversy as it challenges the existing norms established by the Institute of Chartered Accountants of India (ICAI). While auditors are obligated to adhere to the ICAI’s code of ethics, the prohibition on engaging in non-audit work is not explicitly defined. Despite Section 144 of the Companies Act 2013 restricting certain services, there remain numerous services that auditors can offer to their clients.

The NFRA aims to extend its regulatory scope beyond the services listed in Section 144 and may broaden the prohibition to encompass any other services as deemed necessary. Notably, audit firms, especially prominent ones like the Big Four, often refrain from providing non-audit services to listed entities to maintain their reputations. However, they may be less cautious when dealing with unlisted firms.

Some industry experts view this regulatory move as potentially burdensome and going beyond internationally accepted practices. Non-audit services are often lucrative for audit firms compared to the auditing process itself.

The ICAI’s guidance note emphasizes that independence is a subjective matter for auditors. The NFRA’s emphasis on non-audit work is evident from its inspection reports and actions taken against auditors involved in professional misconduct. This heightened scrutiny signals a shift in the regulatory landscape and raises questions about the balance between providing additional services and maintaining the independence and integrity of the auditing process.