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Thursday, Jun 10, 2004

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Fetters on fees

Mohan R. Lavi

Mohan R. Lavi on the recent move to counter undercutting of audit fees

BY PRACTICE, the Institute of Chartered Accountants of India (ICAI) regulates the fees that certain firms of chartered accountants can charge from their clients. In case the firms violate this stipulation, they are held to be guilty of professional misconduct.

Notification dated May 12, 2004, earmarks two types of firms for this norm:

  • Firms consisting of four or more partners but less than eight partners with at least one partner holding a certificate of practice for five years or more; and

  • Firms consisting of more than eight partners with at least one partner holding a certificate of practice for five years or more

    The minimum fees that these firms can charge is as follows:

    The exemptions to the above are:

  • Audit of accounts of charitable institutions, clubs, provident funds, and so on, where the appointment is honorary;

  • Statutory audit of branches of banks, including regional rural banks;

  • Audit of newly formed concerns relating to two accounting years from the date of commencement of their operations; and

  • Certification or audit under the Income-Tax Act or other attestation work carried out by the statutory auditor.

    These guidelines become operative for all audits relating to accounting periods beginning on or after April 1, 2004. It has also been clarified that for this purpose, the audit of Provident Fund Trust, Gratuity Fund, and so on, carried out by the statutory auditor are to be considered as separate and distinct audits so that the restrictions apply to these audits too.

    The ostensible reason why the ICAI has been taking this move would appear to be to prevent under-cutting amongst firms of chartered accountants and giving the smaller firms a share in thepie.

    However, the logic of linking fees to the population of cities would be worth reconsidering. Gandhinagar in Gujarat has a population in excess of two million, and it would be futile if a firm in this city expects to get the same fee as charged by a Chennai firm.

    Being a naturally populous country, in India a dense population does not necessarily translate into additional industries or other clients.

    The list of institutions to which these criteria do not apply should also include NGOs — a virgin territory for firms to obtain assignments and where competition is intense.

    A firm with three partners would stand to gain a lot by charging very low fees if the situation warrants.

    The ICAI has recently permitted networking between chartered accountants and other professional brethren. A direct fallout of this could be an increase in assignments for which the minimum fee is prescribed.

    Most firms would be charging more than the minimum fee prescribed by the Institute.

    But, in these times, when the consumer is king, would it not be prudent to leave the fee issue to be sorted out between the audit firm and the client?

    (The author is a Hyderabad-based chartered accountant.)

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