Communication with previous auditor

Shrikrishna (S) – Dear Arjuna, how was your vacation? Did you enjoy your outing?

Arjuna (A) – Yes, it was fine. But the last time you told me about the disciplinary action; and whenever I thought of it, my mood used to go off!

S – Why? Was it so frightening? I told you only broad principles. And if you are awake and alert, there is nothing to worry about.

A – When I was away, my manager informed me that we got a new audit and it was to be done urgently. I instructed him to start working on it.

S – Good. But did you write to the previous auditor?

A – Actually, I was at the hill station and was not getting the range on my cell. Still, I managed to speak to the previous auditor. He said, ‘Don’t worry; go ahead’. I have to sign the audit next week. Most of it is already done. I will ask the client himself to obtain his NOC.

S – Oh dear! Don’t take it so lightly. You cannot shift the responsibility to the client or anyone else. You and you alone have to write to him.

A – But the client has promised me. If you say, I have to write, I will give my letter to the client who will deliver it to the previous auditor

S – Hey Partha, never commit such a mistake. And remember, you have to do this before accepting the audit and not before signing it.

A – But we have already commenced the audit. It was urgent. Why waste time in such useless formality?

S – You are mistaken. It is not a meaningless formality. It is extremely valuable.

A – What purpose will it serve? It is the client’s prerogative to change the auditor. Why should anybody object?

S – Arjuna, you belong to a graceful profession – a learned profession. You are not a shopkeeper or a mere businessman. All professionals need to be united. Otherwise, client will take advantage and bring both of you in trouble.

A – How? Each year’s audit is a separate contract. What role has the previous auditor to play?

S – It is possible that the client’s dealings are not proper; or he may be lacking discipline. His records may not be straight. Previous auditor may be reluctant to sign.

A – So what? I will take every care and qualify the audit if I feel it necessary.

S – Precisely for this reason the client may have left the previous auditor. You will come to know from him as to whether one would be professionally comfortable signing this audit.

A – But if he objects to my accepting the audit, the client will suffer.

S – Why are you so much worried about the client who approaches you at the eleventh hour? There must be some hitch that the client may be hiding from you. Just ask whether he has paid the fees of previous auditor?

A – How will it matter? I will secure my fees and I know how to recover it.

S – Let me tell you that if you accept the audit when the previous audit fees are unpaid, that in itself is a misconduct. Let alone the other objections.

A – But the previous auditor may have charged exorbitant fees!

S – Remember, it is only the audit fees and not fees for any other services. The Guidelines from Council refers to undisputed audit fees.

A – How can one know whether it is disputed or otherwise?

S – It defines the undisputed audit fees. It means the fees appearing in the balance sheet signed by the auditor. Once it is so, it is deemed to be undisputed.

A – But what if there is cash method of accounting? Nothing will be there in the balance sheet.

S – Then you have to be extra careful. Check the records, write to the client, and write to the previous auditor.

A – What if the previous auditor objects? Or does not issue NOC for a long time?

S – Firstly, remove the wrong notion from your mind that you have to obtain an NOC. The relevant clause nowhere requires that. It only says, you have to communicate with him in writing; before accepting the audit.

A – Can I fax or e-mail? S – Not advisable. Council prefers and recommends a registered post acknowledgment due. RPAD! A – I will hand deliver to him.

S – Then you have to have a proof of delivery. I suggest, even avoid a courier. If RPAD is such a simple thing to do, why do you avoid it? This is typical of you CAs.

A – Wait. I will speak with my audit manager. (Speaks on cell phone). Good Lord! My manager informs me that the previous auditor has already mentioned in his resignation letter that he has no objection to anyone else taking up the audit! Moreover, it is only an internal audit and not statutory audit! I am saved!

S – Blissful ignorance! Mere mention in resignation letter is ‘not sufficient’. There is no substitute to your writing to him. There is no other way.

A – But what about internal audit?

S – Again a wrong notion. The rule applies to all types of audits be it statutory audit, tax audit, VAT audit, Concurrent, Internal, Revenue or Stock audit!

A – That is irritating. That is why our code is a burden.

S – No dear! Why don’t you take it positively? Perhaps, you will get valuable tips; or some advice of caution. Your efforts may be saved if the audit is risky. Or even client will dodge your fees as well! Don’t treat the previous auditor as your enemy.

A – Sometimes, I am confused as to who is a ‘previous auditor’. What if there was no tax audit for last two-three years?

S – Previous auditor does not mean the auditor for the immediately preceding year. It means the auditor who last held the same or similar assignment immediately prior to your appointment. Thus, it could be auditor appointed two-three years ago also.

A – Now that you are telling me all this, tell me, what if the audit is allotted by the Government? By CAG; or by Co-operative Department; or By RBI?

S – Still you are supposed to write. And who told you, you have to actually obtain NOC? You have to simply communicate, wait for a reasonable time.

A – But what if he objects?

S – You have to weigh the objections. If they are valid, you may consider whether or not to accept the audit. Or you may take them into consideration while reporting. But if the objection is regarding non-payment of undisputed audit fees, you are helpless. Otherwise, you will invite trouble for yourself.

A – Why does the Council not compel the auditor to respond quickly?

S – It has! In fact, the Council has advised all the members to respond to such communications quickly.

A – But previous auditor is closely known to me. I don’t think he will take it seriously for such a small fee.

S – I will tell you a real life incident. In one case, both husband and wife were CAs. The wife did the audit of a small housing society for two years. Thereafter the husband signed it. After a couple of years, there was a divorce proceedings between the two and the wife complained to the Council that the husband accepted the audit without communicating with her!

A – Ohh! This is alarming. Good that my Draupadi is not a CA!

S – Therefore, I am telling you, don’t take it lightly; and take it positively. It is in the interest of your profession.

A – Does it apply to tax assignments or certification work as well?

S – Legally speaking, ‘No’. But the Council recommends it as healthy practice.

A – Once a client came to me for advice through another CA. Thereafter, the client approached me directly. What should one do in such a situation?

S – Council recommends that you should ask the client to come through that CA; or at least inform that CA about it. That is a dignified behaviour.

A –   I am slowly getting what you are saying. If we ourselves do not respect our profession, who else will respect it? They will take us for a ride.

S –   Right. Communication with previous auditor indicates unity among professional brothers. You are well aware of what happens when brothers and cousins are not united.

Note :
The above dialogue is with reference to Clause 8 of the First Schedule which reads as under:

Clause (8):  accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;

Further, readers may also refer to the Chapter VII of Council General Guidelines, 2008 dated 8th August, 2008 for guidelines on undisputed fees (refer page nos. 313  – 323 of the Code of Ethics publication January 2009 edition or the official website of ICAI).