Enquiry:

We seek your technical opinion and guidance in the following circumstances for accepting the appointment of Auditor of a Private Limited Company.

The existing auditors of the company were removed by a special Resolution of the Board of Directors of the Company before completion of their term (This being first year of operation of the company) and the proposed firm of Chartered Accountants was offered appointment as statutory Auditors for the referred year. Resultantly, in compliance with requirements of revised code of ethics 210.10, the proposed auditors sent letter through URGENT MAIL SERVICE asking for NOC from existing auditors. The existing Auditor did not respond to the proposed auditor even after the laps of 30 days.

Your opinion is sought in this respect that what options does the proposed auditor will have and what procedure should be adopted by the proposed Auditors in above mentioned circumstances.

Opinion:

We would like to draw your attention to the following paragraphs of the ICAP Code of  Ethics for Chartered Accountants, explaining the procedures where existing auditor is removed before completion of his term:

210.19     Where an existing chartered accountant is removed by the proprietors of the business before he has completed the audit and submitted his report, the existing chartered accountant must immediately inform the Institute with relevant facts about his removal.

210.20     The proposed chartered accountant in practice should not only follow the procedure detailed in the preceding paragraphs of this Section, he should also inform the Institute about the offer of appointment.

210.21     The proposed chartered accountant in practice should not accept the offer without prior clearance from the Institute, which clearance shall not be unreasonably withheld. Provided however, in case the Institute refuses to give its clearance, it shall communicate its decision within 15 (fifteen) days with reasons therefore.

210.16     …. If the proposed accountant is unable to communicate with the existing accountant, the proposed accountant should try to obtain information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management or those charged with governance of the client.

210.17     Where the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a chartered accountant in practice should, unless there is satisfaction as to necessary facts by other means, decline the engagement.

The Committee advices all practicing accountants that where an auditor has been removed before completion of the audit both the removed auditor and the proposed auditor must inform the Institute about relevant facts. Furthermore, the proposed auditor must not accept an audit if clearance from Institute has not been obtained in such cases.

The Committee emphasize that it is a professional and moral obligation for a Chartered Accountant, especially one in practice, to respond to communication from other Chartered Accountants. However, in case such a response is not forthcoming, a Chartered Accountant should take account of section 210.16 and 210.17 referred above.

(November 08, 2013)