Enquiry:   

For the purpose of appointment of external auditors for the public sector entity against the tender for the financial year 2017-18, few chartered accountant firms has quoted fee for financial year 2017-18 lower than as charged by our outgoing auditors, our revenue, expenses & balance sheet size has also increased for the financial year 2017-18.

As per ICAP Code of Ethics for Chartered Accountants:

“Fee quoted lower than that charged by the chartered accountants in practice previously carrying out the audit be regarded as undercutting.”

You are therefore requested to kindly guide us whether can we avail the professional services for the financial 2017-18 from those chartered accountant firms who have quoted fee lower than as charged by our outgoing auditors or otherwise.

 

Opinion:           

The Committee would like to clarify that the entity making appointment of the auditor is responsible to appoint the auditor in accordance with legal and regulatory provisions applicable to such entity.

It is pertinent to mention that the Code of Ethics for Chartered Accountants (the Code) issued by ICAP applies to the members of the Institute.

Section 240.1 of the Code recognizes that audit fee is a commercial matter to be agreed between the auditor and the appointing entity. When entering into negotiation regarding professional services, an auditor may quote whatever fee is appropriate in commensuration with the nature and service to be rendered. However, the quantum and scope of audit work are important and relevant factors in the determination of auditor’s fee. In accordance with requirements of the Code if the scope and quantum of audit work does not materially differ from the work carried out by the previous auditor, the audit fee lower than the fee charged by the previous auditor could be regarded as undercutting.

Based on the information provided in your enquiry the revenue, expenses and financial position of the company has improved/increased from the previous audited year.

In accordance with section 240.1 of the Code, it is not permissible for the incoming auditor to accept an audit engagement at a fee lower than that charged by the previous year external auditor unless the scope and quantum of audit work has reduced compared to the previous audited year. However, the provision of the relevant information (such as the fee being charged by the previous auditor, the scope and quantum of work, the changes in scope and quantum of work etc.) by the appointing entity, prior to the submission of the proposal, to the proposing auditor for determining/ quoting audit fee is also to be given consideration.

It is advisable that the appointing entity’s management or those charged with governance may engage in a dialogue with the proposed auditor(s) to ensure that the auditor(s) have the complete information (such as the previous year audit fee, quantum and scope of the current year’s audit work etc.), necessarily required for the determination of the audit fee. This approach will help in avoiding any miscommunication and/or misunderstanding in relation to the determination and agreement of audit fee. Accordingly, the reporting entity may proceed in the matter in accordance with the guidelines provided by section 240.1 of the Code, the legal and regulatory provisions and the procurement policies and rules applicable in the circumstances.

                                                                                                                         (May 09, 2018)