Impact of Overdue Fees (Section 410.7) of New Code of Ethics of ICAI

All CAs celebrate 1st July as CA Day but it is also celebrated by all doctors and Agriculturists. India is a leading agri-oriented country wherein agricultural sectors continue to remain the biggest employer since ancient times.

Given the cyclical nature of agriculture, many businesses have periodical revenue patterns linked with crop harvest. Not only agriculturists but also dependent industries and their consultants have to follow such revenue cycle which may even get disturbed due to unforeseen contingencies. In fact in many states, it is a tradition of many businesses to settle their accounts during Diwali and even many CA firms have voluntarily adjusted themselves to seasonal cycles.

Due to such warm gestures, CAs have been preferred consultants for most of the MSMEs since inception.

However, as per global experiences, it is expected that the firm will collect payment of earlier year fees before the audit report is issued and so, as per Section 410.7, a self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued. In such cases, it is even proposed to appoint an appropriate reviewer who did not take part in the audit engagement, review the work performed.

Further, Section 511 prohibits members to carry out audits of clients whom loans and guarantees are given and if there is material outstanding fees then such provisions will be applicable.

When a significant part of fees due from an audit client remains unpaid for a long time, the firm will have to determine whether the overdue fees might be equivalent to a loan to the client; and further, if it is appropriate for the firm to continue with the audit engagement?

In a nutshell, as per this newly introduced clause, if there is a significant fees outstanding from client then the same shall be treated as loan to client and therefore auditor’s independence shall be deemed to be lost and he may not be able to do audit.

An outstanding amount of Rs. 1 lakh may be significant for some SMPs but even an amount of Rs. 1 crore may not be significant for large firms including Big4 in the absence of any clarification by ICAI.

Given the cyclical nature of the agricultural sector and as per 70+ year old practice in India, audit fees are usually received very late and sometimes even after 1 year.

At present, due to Covid-19 pandemic, getting fees from clients on a timely basis is likely to be extremely difficult as MSMEs are also badly affected.

The deeming fiction of outstanding fees as loan to clients is a case of extreme imagination, as the relation is Auditor & Auditee can never be converted as borrower and lender. In fact, we have not come across such examples from other professional / regulatory bodies in India, having classified outstanding fees as loans except ICAI and such novel move will restrict its own members, particularly Small & Medium Practitioners (SMPs) while rendering their services.

Due to Covid-19, there has been a global crash and many businesses are about to collapse in India. In fact, Government of India has understood this position and offered Atmanirbhar loans with a 1 year moratorium which means payment will be made from second year onwards. MSMEs are expecting support in the form of extended timeline from all service providers including auditors in view of cash crunch.

Our Hon’ble Prime Minister, Shri Modiji has requested everyone to offer best possible help to MSMEs too, so that our economy can revive faster.

However, the above newly introduced clause is creating a huge roadblock because if SMPs don’t recover old fees from MSMEs then it will be classified as a loan and practically, there is a threat of disqualification for the auditor.

New Code of Ethics has put SMPs in a dilemma with this novel loan provision which may affect their ability to retain audit assignments by hampering growth prospects.

Therefore, this clause is detrimental not only to SMPs but also to MSMEs and need to be immediately deleted in view of ongoing pandemic and traditional practice followed in India.

In the next Series, we will discuss about novel proposal to split audit and tax functions which is probably the first of its kind of initiative in the world. ~ CA Unmesh Narvekar. 9821236179. Email: [email protected]


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One Comment

  1. Ca sanjive Mahajan says:

    In our opinion this is not a right perception of the clause. If it is so, it will help the auditors to make all the efforts to collect the fees earlier so that they do not fall into new clause of self interest threat. This will of great help in recovering long overdue fees

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September 2021