Enquiry:

The Public Interest Entity (PIE) floated a tender inviting bid from CA firms for accounting and audit work. There was no mention in the tender document that firms could apply in consortium/ JV for the assignment. Moreover, as per text of the terms of reference of the bid only technically and financially qualified firm (singular connotation) is to be selected for the above mentioned services. Keeping in view the above scenario, we request to provide technical advice on the following matters:

1. For PIE, is a firm allowed to undertake both accounting work and audit of financial statements.

2. If not allowed, then can conflict of interest be avoided in either of the following circumstances:

a. In response to the tender, one firm submits bid for the providing both accounting and auditing work in its own name. To avoid conflict of interest it mentions in the bid documents that it has entered into an agreement (internal agreement) with another firm that either of the assignments shall be performed by one of them. Although, the responsibility for the execution of both assignments would rest on the applicant firm.

b. Two firms submit one bid by forming JV/ consortium for both the assignments together and enter into agreement (internal agreement) between themselves defining the allocation of the work. Can conflict of interest be avoided under such an arrangement, whereas submission of joint bid implies that both the firms shall be jointly responsible for both the assignments.

It is requested to kindly provide technical guidance on each of the scenario stated above.

Opinion:

The ICAP revised Code of Ethics for Chartered Accountants 2015 (the Code) provides a conceptual framework for applying fundamental principles of professional ethics, one of which is ‘Independence’.

A practicing chartered accountant is required to apply the conceptual framework to identify threats to compliance with the fundamental principles and assess their significance and implication. The responsibility of evaluation of such threats to compliance with the fundamental principles rests on the practicing chartered accountants and they should consider qualitative as well as quantitative factors while performing such evaluation. In case where practicing chartered accountants render such services which may coincide with management functions and management decision making, the threat of “Self Review” could exist.

In this connection the Committee would also like to refer the paragraphs 290.164 – 290.167 of the Code which states:

Preparing Accounting Records and Financial Statements

General Provisions

“290.164 Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. These responsibilities include:
• Originating or changing journal entries, or determining the account classifications of transactions; and
• Preparing or changing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders).”

“290.165 Providing an audit client with accounting and bookkeeping services, such as preparing accounting records or financial statements, creates a self- review threat when the firm subsequently audits the financial statements.”

Para 290.166 – 67 describes the activities that are considered to be a normal part of the audit process and do not, generally, create threats to independence.

Para 290.168 of the Code allows the audit firm that may provide accounting related services only in case of audit clients that are not public interest entities, subject to applying certain safeguards. Such services are considered to be of a routine or mechanical nature, so long as any self-review threat created is reduced to an acceptable level. This relaxation does not exist for audit clients that are public interest entities.

In the light of above, the Committee views on your queries are as follows:

1. Audit firm is not allowed to undertake both accounting work and audit of financial statements of public interest entities simultaneously.

2. The independence of mind and in appearance is necessary to enable the practicing chartered accountants to express a conclusion, without bias, conflict of interest or undue influence. Therefore, in Committee’s view, the fundamental principle of ‘Independence’ will be impaired in both the given circumstances.

(December 15, 2016)