NOC (Communication with previous auditor) – A tool, defense, weapon or?

‘A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing;’ [Clause 8 of Part I of The First Schedule to Chartered Accountants Act, 1949]

The provision probably found existence in the Act to institute discipline amongst auditors, avoid litigation with auditee and also to help maintaining the independence of auditors.

However, whether this provision is being complied with by PU’s in letter and spirit? Has it yielded the desired output? Is it helping retiring auditors to recover their dues? Is it working as hindrance to auditee in changing auditors? Is it useful for the incoming auditor? Has ICAI been benefited by this provision in exercising disciplines? Numerous such questions may raise the eyebrows of the reader.

In fact, this provision is not been taken very seriously by many of the PU’s except in case of statutory audit/tax audit. Whereas, it applies to wide range of services. The snapshot of the same is given below:

MANDATORY	RECOMMENDATORY
1. Statutory audit and Tax audit	1. Certification
2. Internal audit, GST audit, concurrent audit, stock audit, revenue audit or any other kind of audit, whether of government or non-government entities, where the previous auditor is a Chartered Accountant.	2. Assignments done by other professionals.
3. Even in a case where the previous auditor happens to be an auditor for a year other than the immediately preceding year. (Situation when there was no auditor in the immediately previous year.)	3.  Appointment as a Liquidator, Trustee, or Receiver and the predecessor was a Chartered Accountant.

Modes of Communication

The Council, in numerous decisions in the past, has upheld that for the purpose of establishing communication with the retiring auditor under the said clause 8, the letter/ communication in writing by the incoming auditor must reach to the hands of outgoing auditor and only when the incoming auditor has sufficient evidence substantiating the same, proposed appointment can be accepted and not before.

Hence, following are recommended ways of communication –

i. Delivery by hand with acknowledgement in writing,

ii. Registered post with acknowledgement due,

iii. Delivery by email with read receipt due.

Responsibility of Retiring Auditor to Respond

It is desirable that a member, on receiving communication from the auditor who has been appointed in his place, should send a reply to him as soon as possible setting out in detail the reasons, which according to him had given rise to the change and other attendant circumstances but without disclosing any information as regards the affairs of the client which he is not competent to do.

Professional Reasons for not Accepting an Audit

Based on the facts of the case and response from retiring auditor, incoming auditor need to evaluate if there are any professional reasons for not accepting an audit.

S. No.	Professional reasons for not accepting an audit	Remarks
(i)	Non-compliance of the provisions of Sections 139 and 140 of the Companies Act, 2013.	An auditor who accepts the audit would be guilty of professional misconduct.
(ii)	Non-payment of undisputed audit fees by auditees other than in case of sick units for carrying out the statutory audit under the Companies Act, 2013 or various other statutes.	An auditor should not accept the appointment unless such fees are paid, or otherwise would be guilty of professional misconduct. “Undisputed” Audit Fees -> Provision for audit fee in accounts signed by both the auditee or the auditor. “Sick Unit” -> Where the net worth is negative.
(iii)	Non-payment of other dues by auditees.	No professional misconduct in accepting the audit. However, incoming auditor should in appropriate circumstances use his influence in favour of his predecessor to have the dispute as regards the fees settled.
(iv)	Issuance of a qualified report.	There is no rule, written or unwritten, which would prevent an auditor from accepting the appointment offered to him in these circumstances. He may accept the audit if he is satisfied that the attitude of the retiring auditor was not proper and justified. If he feels that the retiring auditor had qualified the report for good and valid reasons, he should refuse to accept the audit.

Repercussions of Non-Compliance

The incoming auditor shall be deemed to be guilty of professional misconduct and based on the circumstances of the case and the adjudicating authority (Board of Discipline or Disciplinary Committee), following actions are provided under sections 21A and 21B of the Chartered Accountants Act, 1949 –

• reprimand the member;
• remove the name of the member from the Register permanently or for such period, as adjudicating authority thinks fit; (Board of Discipline: Up to three months; Disciplinary Committee: Any period)
• impose such fine as adjudicating authority may think fit. (Board of Discipline: Up to rupees one lakh; Disciplinary Committee: Up to rupees five lakhs)

FAQs

Q.1 What should be the correct procedure to adopt when a prospective client tells you that he wants to change his auditor and wants you to take up his work?

Ans. Recommended Procedure in Code of Ethics –

• The client should be asked whether the retiring auditor had been informed of the intention to change.
• If the answer is in the affirmative, then a communication should be addressed to the retiring auditor.
• If, however, it is learnt that the old auditor has not been informed, and the client is not willing to make the first move, it would be necessary to ask him the reason for the proposed change.
• If there is no valid reason for a change, it would be healthy practice not to accept the audit.
• If, however, he decides to accept the audit, he should address a communication to the retiring auditor.

Q.2  Is NOC (no objection certificate) required from previous auditor?

Ans: The clause provides for communication with previous auditor where he has an opportunity to safeguard his interest and also public interest. There is no provision of NOC and it is an inherent right of client to decide its auditor and change. NOC is a trade parlance term and used generally, while however, the provision is for communication.

Q.3 Incoming auditor accepted an appointment as auditor and commenced the working. Later, after he came to know that an inadvertent omission to communicate with previous auditor has occurred, he sent a letter to retiring auditor through registered post with acknowledgement due. Is he subject to professional misconduct?

Ans: Yes, since the audit was accepted before making the communication and waiting for a reasonable time.

Q. 4 Incoming auditor accepted appointment as auditor and commenced the working on the very day he sent the letter to previous auditor. Is he subject to professional misconduct?

Ans: Yes, since the audit was accepted before waiting for a reasonable time after the communication was made.

Q.5  Is communication under this clause required where retiring auditor is already aware of change and adequate evidence proving so, exist?

Ans: Yes, the provision of Clause 8 requiring a communication with the previous auditor is absolute and applicable even in cases where the member is aware that the previous auditor had been made aware of the appointment.

Q.6 Is tax auditor, appointed for conducting special audit under the Income Tax Act, required to communicate with statutory auditor?

Ans: It is not mandatory. However, in the opinion of the Council, it would be a healthy practice to communicate.

Q.7  Is communication required to prior previous auditor in addition to existing auditor?

Ans: No, communication is mandatorily required to be made only to the previous auditor who held such position immediately before the incoming auditor and not any prior auditors.

Q.8 Will client information disclosure by the retiring auditor to the incoming auditor as a response to the communication under said clause 8 amounts to breach of confidentiality principle?

Ans:

> “No”

> For such disclosure is required by code of ethics as a response to legal compliance of clause 8 of Part I of the first schedule to The Chartered Accountants Act, 1949, such disclosure is permitted under section 140 of code of ethics.

>  However, it is recommended to the retiring auditor to give out only such information as may help the incoming auditor in understanding/ finding out whether there are any ‘objectionable circumstances’ prevailing or would prevail in his/her knowledge without disclosing any information as regards the affairs of the client which he is not competent to do.

Q.9  What to do if no response received from retiring auditor?

Ans:

> Generally, after waiting for a reasonable time from the date of communication, the incoming auditor may accept the appointment and start his work.

> However, in case the time schedule given for the assignment is such that there is no time to wait for the reply from the outgoing auditor, the incoming auditor may give a conditional acceptance of the appointment and commence the work which needs to be attended to immediately after he has sent the communication to the previous auditor in accordance with this clause.

In his acceptance letter, he should make clear to the client that his acceptance of appointment is subject to professional objections, if any, from the previous auditors and that he will decide about his final acceptance after taking into account the information received from the previous auditor.

Q.10  A company appointed an auditor and while the audit is ongoing, due to tensions between client and auditor, client approaches and requests another Chartered Accountant to be appointed as auditor in place of existing auditor. Should the audit be accepted by the new auditor?

Ans:

> The incoming auditor should evaluate the reasons for such change by discussing it with the client and communicating with the existing auditor.

> In case the incoming auditor is satisfied that the conduct and attitude of existing auditor is improper, he may accept the appointment.

> However, if ascertains that the removal/ change of auditor is not justified, it would be healthy practice not to accept the audit.