ICAI- The Rebirth of Fixing Fee Undercutting

The Institute of Chartered Accountants of India is contemplating conveying back regulation that prohibits undercutting of fees by audit firms. In a recent council meeting, council members discussed returning to the earlier ethical rule when firms weren’t allowed to undercut statutory audit fees. The members deliberated on the issue and directed the Ethical Standards Board to study the provisions that should be brought in to restore the quality of audits and also ways to bring back the provisions that prohibited the undercutting of fees. The move may be because of several auditing firms announcing their resignations from the prominent companies. So far in the year 2018, about 40 firms have resigned mid-term, compared with seven auditor resignations in 2017.


In 2006 the amended Chartered Accountants Act came into force w.e.f. 17.11.2006. It allowed auditors firms to accept assignments that were lower than the previous year’s fee. The said amendments were made with a clear intention to give an open playground to Big Four of PwC, Deloitte, EY and KPMG, which ultimately managed to capture a large market share. The firms won the big accounts by bidding lower fees and grab a substantive audit market share. Now the same firms require protection of work in hand hence the latest discussion shall surely set in their favour. Though the simple reason provided is the infrastructure, people costs and operating overheads but in fact, it has nothing to do with this clause of restricting the undercutting. Many stalwarts opine that a restoration of the law restricting fee-undercutting shall balance the rotation requirements with quality. The fact is that Big 4 firms are having 85% of the fee of BSE 500, PE-invested companies plus large private companies. 


The Conduct of the Members is regulated under the Chartered Accountants Act 1949 and the regulations framed thereunder. Code of Conduct is essentially a set of professional ethical standards, regulating the relationship of CAs with clients, employers, employees, fellow members of the group and public generally. ICAI first published the book Code of Ethics in 1963 elaborating various items comprised in the schedules to the CA Act and has been updating the same from time to time. The Professional Misconduct is any act or omission specified in the Schedules to the Act. The Other Misconduct takes care of any misconduct not specified in any of the Schedules to the Act even if it does not arise out of the professional misconduct. The applicability of the Professional misconduct to the members is as follows.

Members in Practice

  • Part I  of First & Second Schedules

Members in Service

  • Part II of First Schedule

Members of the Institute generally

  • Part III  of First Schedule
  • Part II of Second Schedule

Members of the Institute generally

  • Part IV of First Schedule
  • Part III of Second Schedule


The present clause 12 of part 1 of the first schedule is applicable to Professional misconduct in relation to CAs in practice. The present clause 12 allows a person not being g a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements. Though the said clause was deleted and the fate of such spirit has been left to the members with an expectation to keep in mind the spirit of the said clause and use discretion in such matters.

Prior to 2006 amendments, A Clause 12 of Part I of the First Schedule was as under:

Accepts a position as Auditor previously held by some other Chartered Accountant or a restricted state auditor in such conditions as to constitute undercutting

In January 2000, the council deliberated that the said clause does not differentiate between the audits of Government and non-Government authorities. Hence from 1st April 2000, the provisions of the said clause were made applicable to all kinds of audits.

However, this clause prohibited the acceptance of audit “in such condition as to constitute undercutting.” There is no absolute bar on charging lower fees. One has to objectively justify the same on facts.  There may be a significant reduction in the sales or volume of business. The difference in fees may also arise due to a difference in the pattern of charging, such as fees inclusive of expenses (lump sum) vis-à-vis the fees and expenses charged separately.


The deletion of clause 12 in 2006 from the first schedule surprised the fraternity. The said act of 2006 was in the air since 2003. However, in the year 2004, ICAI bid to prevent undercutting by prescribing a base level of audit fees (a level below which audit fees cannot be charged or received) for a person in practice who is a partner of a firm with 4-8 partners or a firm with more than eight partners. It was to ensure that partners of mid-sized and large firms do not “under-cut” audit fees to the detriment of smaller firms and one-man practice units. Further, the 4-8 partner size firms made accountable to be guilty of professional misconduct if accepts audit work on behalf of the firm for an audit fee of less than Rs 5,000 per annum (in cities with the population of 2 million or above). In cities/towns having a population less than 2 million, the base level for such category of firms has been fixed at Rs 3,000 per annum. The restriction on audit fees became operative for all audits relating to accounting periods beginning on or after April 1, 2004, and by 2006, all such moves aborted to give way for the birth of 2006 amendments. The said rule was subject to many conditions such that the same was not applicable for an audit of accounts of charitable institutions, clubs, provident funds, where the appointment is honorary i.e. without any fees.  Further, it was also not applicable in respect of statutory audit of branches of banks including regional rural banks or on audit of newly formed concerns relating to two accounting years from the date of commencement of their operations and also for certification or audit under the Income-Tax Act or other attestation work carried out by a statutory auditor.


A query was raised about the applicability of the old clause 12.  

Whether ‘C and Co.’ appointed by the Company Law Board for auditing the accounts of a Government Company for a particular year can without infringing the relevant law and rules and procedure accept such audit on a remuneration which is lesser than that paid to another auditor for auditing the accounts of the immediately preceding previous year. It may be pointed out that in the year in question i.e. 1969-70; there has been a substantial reduction in the work.

In view of the fact that in the case under consideration on the facts given by the querist, there has been a substantial reduction in the work for the year 1969-70, it would appear that a lower fee charged for the year 1969-70 by C and Co., Chartered Accountants, would not constitute ‘under-cutting’. Hence, in the opinion of the Committee the acceptance of audit by Messrs C. & Co., Charted Accountants, on the facts given by the querist, would not amount to a professional misconduct on the part of Messrs C. & Co. and by accepting the said appointment they would not commit any breach of the Code of Conduct to be observed by members of the Institute.

Further, on the subject, the council has occasions to decide as follows:

A chartered Accountant accepted the appointment as Auditor at a lower remuneration than what was charged by the previous auditor. – Held in Totality of conditions and in view of the appointment of an internal auditor within the organisation, there was no need for the detailed audit as was being done by the complainant, the previous auditor, and the same did not amount to undercutting and the chartered accountant was not guilty under the clause.

{S .N. Johri vs N .K.Jain – Page 1042 of Vol.IV of the Disciplinary cases decided on September 1973}

A Chartered Accountant accepted the audit at a lower fee than what was charged by the previous auditor. He audited the books at his own headquarters and no travelling expenses were incurred by him while the previous auditor did the audit outside his headquarters and thus must have included some expenditure by him on travelling. Moreover, the amount of Audit Fee was very small and the difference between the audit fee charged by the chartered accountant and the previous auditor was insignificant. The fee was quoted having regard to the audit of a small organisation. – Held he was not guilty of undercutting.

{ K.K.Sud vs K.N. Chandla – Page 306  of volume .V of the Disciplinary cases decided in October 1978. }

Where a Chartered Accountant had conducted the audits at a lower fee than what was charged by the complainant, Held that he was guilty under clause (12)

{ V.K.Gupta vs A.K.Jain – Page  49 of Vol. VII(2) of the Disciplinary Cases – Council decision September 1991. }

Since the nature of work involved in tax audit assignment for subsequent years was found to be different from the earlier years and tax audit for two assessment years had been given to him. At a consolidated fee of Rs. 10000/- which was not less than the fee paid by the corporation for the assessment year 1985-86, there was no undercutting and therefore he was not found guilty of contravention of clause (12).

{ M.S.Padmanabhan Nair vs. R . Chidambaram- Page 501 of Vol VII (2) of Disciplinary cases – Council’s decision in December 1996 }

Categories: CA, CS, CMA

View Comments (1)

  • If ICAI wants to prevent undercutting of fees, then ICAi should start allotting audit work to firms and collect & transfer fees from clients to audit firms.



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