Can our auditor also keep our books and do our tax work?

Your auditor is already inside your numbers. It is tempting to ask the same office to write up the books, run the payroll entries, file the returns and "just sort out" the accounting software. One bill, one team, one phone number.

The Companies Act 2013 draws a hard line here. Some services an auditor can never give the company it audits. Some it can give only with approval. If you cross the line, the auditor can lose the audit and both of you can be fined.

This article explains the rule as the Act words it.

The short answer

An auditor cannot keep your books of account. "Accounting and book keeping services" is the first service on the banned list (s.144(a), Companies Act 2013).

An auditor can do some other work for you, but only if the Board of Directors or the audit committee approves it, and only if it is not on the banned list (s.144, Companies Act 2013).

Tax work needs a closer look. We deal with it below.

Which companies does the rule cover

Read the opening words of the section. It says "An auditor appointed under this Act" shall provide only such other services as the Board or audit committee approves (s.144, Companies Act 2013).

The section does not exempt private, small or one-person companies, and sets no turnover or capital limit. Any company with an auditor appointed under the Act is within it.

The approval comes from "the Board of Directors or the audit committee, as the case may be" (s.144, Companies Act 2013).

The banned list

The section lists the services an auditor may not provide. These are the words of the Act, in plain form (s.144(a) to (i), Companies Act 2013):

• Accounting and book keeping services.
• Internal audit.
• Design and implementation of any financial information system.
• Actuarial services.
• Investment advisory services.
• Investment banking services.
• Rendering of outsourced financial services.
• Management services.
• Any other kind of services as may be prescribed.

Items 1 to 8 are named in the Act itself. Item 9 lets the Central Government add services by rules. Do not assume the list stops at eight: check the current Companies (Audit and Auditors) Rules, 2014, as amended, for any added service before you rely on it.

What the common ones mean in practice

Bookkeeping is the one most companies ask about. Writing up the ledgers, posting vouchers and preparing the books of account is "accounting and book keeping". The auditor then checks their own work. That is the conflict the section exists to remove.

Design and implementation of a financial information system means setting up the system that produces your numbers. The auditor would then audit their own design.

Internal audit is named in the list, so the statutory auditor cannot also be the company's internal auditor.

Outsourced financial services and management services are broad phrases. The section itself does not define them. If the work looks like the auditor running part of your finance function, treat it as inside these words and ask for a written view from your own advisers before proceeding.

What about tax work

Here the exact words matter. The banned list does not name "tax return filing", "tax advice" or "tax audit". Nothing in the list says an auditor may never advise on tax.

That does not make tax work automatically safe. Three points to keep in mind.

First, any service that is not banned still needs approval from the Board or the audit committee (s.144, Companies Act 2013). It cannot simply happen because the auditor offered.

Second, tax work often drifts into banned territory. If the auditor prepares the tax computation from books the auditor also wrote, that is bookkeeping first and tax second. If the auditor runs the whole tax and compliance desk as an outsourced function, the work may fall under "outsourced financial services" or "management services".
Third, the Act on remuneration separates audit fees from other fees. The remuneration of the auditor, fixed in general meeting, covers the audit and the expenses of the audit. It "does not include any remuneration paid to him for any other service rendered by him at the request of the company" (s.142(2), Companies Act 2013). Keep non-audit work, if any, clearly separate in the papers.

If you are unsure whether a particular piece of tax work is safe, have it reviewed by a CA who is not the auditor, before the engagement starts.

"Directly or indirectly": the relatives and linked entities rule

Do not assume the ban stops at the auditor's own desk. It bars the banned services whether rendered "directly or indirectly" to the company, or to its holding or subsidiary company (s.144, Companies Act 2013). The Explanation says what that includes.

If the auditor is an individual, it includes services rendered by the auditor:

• himself, or
• through his relative or any other person connected or associated with him, or
• through any other entity in which he has significant influence or control, or
• through any entity whose name, trade mark or brand he uses (Explanation (i), s.144, Companies Act 2013).

If the auditor is a firm, it includes services rendered:

• by the firm itself, or
• through any of its partners, or
• through its parent, subsidiary or associate entity, or
• through any other entity in which the firm or any partner has significant influence or control, or
• through any entity whose name, trade mark or brand the firm or any partner uses (Explanation (ii), s.144, Companies Act 2013).

In plain words: moving the bookkeeping to a sister concern, a spouse's practice, or a company that shares the firm's brand does not solve the problem. The Act looks through the structure.

The group reach

The ban covers services to "the company, or its holding company or subsidiary company" (s.144, Companies Act 2013). So if your auditor audits the parent, the auditor cannot keep the books of the subsidiary, and the reverse.

As worded, the section names holding and subsidiary companies. It does not name associate companies or fellow subsidiaries on that side. Check any service to a group entity before you accept it.

Why it also costs the auditor the audit

The ban is not just a rule about conduct. It is also a disqualification.

A person who "directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company" is not eligible for appointment as an auditor of the company (s.141(3)(i), Companies Act 2013). The same meaning of "directly or indirectly" applies, taken from the Explanation to s.144 (Explanation to s.141(3)(i), Companies Act 2013).

If a person already appointed incurs any disqualification in s.141(3) after appointment, the person must vacate office, and the vacation counts as a casual vacancy (s.141(4), Companies Act 2013). The Board must then fill the vacancy within thirty days. Where the vacancy comes from a resignation, the company must also approve the new appointment at a general meeting convened within three months of the Board's recommendation (s.139(8)(i), Companies Act 2013).

So a bookkeeping arrangement that starts mid-year can put your audit in a vacancy at the worst time, close to the accounts.

Other disqualifications (for example a relative who is a director or key managerial personnel) sit in other clauses of s.141(3).

What the penalties are

Contravening any provision of sections 139 to 146 triggers s.147 of the Companies Act 2013. Section 144 is within that range.

The company. The company is punishable with a fine of not less than ₹25,000, which may extend to ₹5 lakh. Every officer in default is punishable with a fine of not less than ₹10,000, which may extend to ₹1 lakh (s.147(1), Companies Act 2013).

The auditor. An auditor who contravenes s.144 is punishable with a fine of not less than ₹25,000, which may extend to ₹5 lakh or four times the auditor's remuneration, whichever is less (s.147(2), Companies Act 2013).

Knowing or wilful breach. If the auditor acted knowingly or wilfully, with intent to deceive the company, shareholders, creditors or tax authorities: imprisonment up to one year, and a fine of ₹50,000 to ₹25 lakh or eight times the remuneration, whichever is less (proviso to s.147(2), Companies Act 2013).

After conviction. A convicted auditor must refund the remuneration received to the company, and pay damages for loss arising from incorrect or misleading statements in the audit report (s.147(3), Companies Act 2013).

Step by step: checking your own company

• List every service the audit firm, its partners and any linked entity provide to your company, your holding company and your subsidiaries. Include small items such as software set-up or payroll processing.
• Compare each item with the nine-item list in s.144. Anything that matches must stop, or the audit firm must be replaced.
• For work that is not banned, put it to the Board or audit committee for approval and record the approval in the minutes (s.144, Companies Act 2013).
• Check the indirect routes. Ask the auditor in writing which relatives, partners, associate entities and brand-sharing entities provide any service to the company or its holding or subsidiary companies. The Explanation to s.144 is the test.
• Keep the bills apart. Audit remuneration and permitted other fees should be separate (s.142(2), Companies Act 2013).
• Fix the books yourself. If the auditor has been keeping them, move the work to an in-house accountant or an independent practitioner with no link to the auditor, before the audit starts.
• Repeat every year when you reappoint or ratify the auditor.

What not to do

• Do not let the auditor "just prepare the trial balance" and then audit it. That is bookkeeping.
• Do not route the work through a relative's firm or a sister entity. The Explanation to s.144 reaches that route.
• Do not rely on an engagement letter that calls bookkeeping "assistance" or "review support". The nature of the work decides.
• Do not treat tax work as automatically permitted. It needs approval, and some tax-desk arrangements can fall into banned categories.

What to do now

• Next step: list all non-audit services your auditor and its linked entities currently provide, and compare them with the s.144 list (s.144, Companies Act 2013).
• Deadline: none is fixed for the check itself. Any permitted other service must be one the Board or audit committee has approved (s.144, Companies Act 2013). If an auditor became disqualified after appointment, the Board must fill the casual vacancy within thirty days (s.139(8)(i), Companies Act 2013).
• Consequence if you ignore it: the auditor must vacate office (s.141(4), Companies Act 2013). The company faces a fine of ₹25,000 to ₹5 lakh, and each officer in default ₹10,000 to ₹1 lakh (s.147(1), Companies Act 2013). The auditor faces the s.147(2) fine.

Have a CA review your facts before you act or file.

FAQs

Can our auditor prepare our financial statements from books we maintain?
The banned list covers accounting and book keeping services (s.144(a), Companies Act 2013). Whether drafting statements from your books is that or a permitted service depends on how much of the accounting the auditor is doing. Where the auditor produces the numbers rather than checks them, treat it as banned.

Does the ban apply to a small private company?
As worded, s.144 applies to "an auditor appointed under this Act" and carves out no class of company. The section contains no exemption for private or small companies.

Our auditor's relative does our bookkeeping. Is that allowed?
No, if the services are the banned kind. For an individual auditor, services rendered "through his relative" count as rendered indirectly (Explanation (i), s.144, Companies Act 2013).

Can the auditor file our income tax returns?
The s.144 list does not name return filing. Any such service still needs Board or audit committee approval, and it must not amount to a banned service such as bookkeeping or outsourced financial services. Take advice on your specific engagement.

We found the problem after the audit report was signed. What now?
The disqualification under s.141(3)(i) and the vacation rule in s.141(4) turn on the facts. The penalties in s.147 apply to contraventions of s.144. Take advice before any step.

---

See Also

• Can a relative of a director be our company's auditor?
• What must our first board meeting do within 30 days of incorporation?
• What Your Auditor Must Check and Report: Section 143 and Fraud Reporting