The Growth of Audit Fees Trails Behind Corporate Expansion in India

Audit Fees

The Growth of Audit Fees Trails Behind Corporate Expansion in India

Audit fees see a modest 28% increase amidst heightened scrutiny on auditors, driven by rising talent and organizational expenses.

Audit Fees

Companies experienced a modest uptick as they fell short of matching their growth and operational performance. Market capitalization surged by 92.75%, net sales saw an 83.7% rise, and profit after tax (PAT) increased by 126.2%. According to data from Prime Database, audit fees for Nifty 500 companies climbed from ₹1,114 crore in FY18 to ₹1,430 crore in FY23, while for Nifty 50 companies, they rose from ₹404 crore to ₹466 crore.

Despite the marginal increase in audit fees, auditors are facing challenges due to the escalating complexity of business operations, heightened regulatory scrutiny on listed entities, evolving reporting requirements, and rising talent and organizational costs each year.

Audit fees for Nifty 500 increased from ₹1,114 crore in FY18 to ₹1,430 crore in FY23.

One significant factor hindering auditors from negotiating sufficient fees is the mandatory audit rotation mandated by company law every five years. Audit committees and CFOs exploit the competition among firms to limit fee increases. Concurrently, companies are imposing stricter deadlines on auditors to finalize reporting processes, adding to costs and work pressure.

Amidst the dual challenge for Indian businesses of navigating complex regulatory environments and coping with disruptions to achieve stakeholder objectives, trust becomes crucial. If trust forms the foundation of all organizational actions that drive significant outcomes, it should warrant a premium.

Auditors in India are receiving insufficient compensation compared to their counterparts in companies listed on both the NYSE and the Indian stock exchange, despite performing essentially the same tasks.

While expectations placed on auditors are increasing, this isn’t reflected in their audit fees. Delivering a high-quality audit demands several components, including skilled talent, advanced technology, and robust quality management processes. Sustained investment in all these areas is necessary, but the low fee levels pose a challenge. Nevertheless, some companies are defying this trend and are willing to pay a premium to auditors for timely and comprehensive reporting.

Despite the effort, complexity, and risks involved, India ranks among the lowest in terms of audit fees compared to other countries. However, some companies are willing to acknowledge the quality of talent, sector expertise, and technology-driven insights provided by audit firms.

Audit fees in India significantly lag behind those in the US and UK markets. For example, for all listed companies on the FTSE in the UK, the audit fee increased by 75% between 2018 and 2023, demonstrating a compound annual growth rate (CAGR) of 11.82%.

Read More: Late Filing Penalty under Section 234F of the Income Tax Act for FY 2023-23

Audit firms are facing growing pressure from clients to decrease billing hours by leveraging technology. However, this poses a dilemma as it requires investment in technology, including software licenses and data storage, which could be challenging given the current fee levels.

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Income Tax Audit Due Date is nearing: All you need to Know about Tax Audit u/s 44AB

In accordance with Section 44AB of the Income Tax Act, 1961, specific taxpayers must perform an audit of their financial records for income tax purposes. The deadline for submitting the income tax audit report for the Assessment Year 2023-24 is September 30, 2023.

 

Tax Audit

The Income-tax Law requires taxpayers to get the audit of the accounts of their business/profession done from the viewpoint of Income-tax Law. Section 44AB of the Income Tax Act marks the provisions relating to the class of taxpayers who are required to get their accounts audited by a chartered accountant. The audit under Section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of Section 44AB​ is called a tax audit.

Is it mandatory for someone who already has their accounts audited as per another law to undergo a separate audit to meet the Section 44AB requirement? Taxpayers like companies or cooperative societies are required to get their accounts audited under their respective laws. Section 44AB provides that, if a person is required by or under any other law to get his accounts audited, then he need not again get his accounts audited to comply with the requirement of Section 44AB.

 

Tax Audit

 

In such a case, it shall be sufficient if such person gets the accounts of such business or profession audited under such law and obtains the report of the audit as required under such other law and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD (refer to next FAQ for relevance of these forms). ​

 

Chartered Accountant and Tax Audit Report

The Chartered Accountant conducting the tax audit is required to give his findings, observations, etc., in the form of an audit report. The report of tax audit is to be given by the chartered accountant in Form Nos. 3CA/3CB and ​3CD. ​​​​​​​The report of the tax audit conducted by the chartered accountant is to be ​furnished in the prescribed form. The form prescribed for audit report in respect of audit conducted under section 44AB​ is Form No. 3CB and the prescribed particulars are to be reported in Form No. 3CD.

In case of persons who are required to get their accounts audited by or under any other law, the form prescribed for audit report is Form No. 3CA​ and the prescribed particulars are to be reported in Form No. 3CD.​

 

Who is required to get a Tax Audit done​​​​​

As per section 44AB, the following persons are compulsorily required to get their accounts audited :

 

1. A person carrying on business, if his total sales, turnover, or gross receipts (as the case may be) in business for the year exceed or exceed Rs. 1 crore. This provision is​ not applicable to the person, who opts for a presumptive taxation scheme under Section 44AD​ and his total sales or turnover doesn’t exceed Rs. 2 crores.

 

Note: The threshold limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 10 Crores in case when cash receipts and payments made during the year do not exceed 5% of total receipts or payments, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.

 

tax audit

 

2. A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs.

3. An assessee who declare profit for any previous year in accordance with Section 44AD​ and decreases profit for any of one 5 assessment year relevant to the previous year succeeding such previous year lower than the profit computed as per Section 44AD​ ​ and his income exceeds the amount which is not chargeable to tax.

4. If an eligible assessee opts out of the presumptive taxation scheme, within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.

5. A person who is eligible to opt for the presumptive taxation scheme of Section 44ADA, but claims the profits or gains for such a profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.

6. A person who is eligible to opt for the presumptive taxation scheme of Sections 44AE but claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of Sections 44AE.

7. A person who is eligible to opt for the taxation scheme prescribed under Section 44BB* or Section 44BBB** but claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.

 

*Section 44BB is applicable to non-resident taxpayers engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on a hire basis to be used in the exploration of mineral oils.

 

**Section 44BBB​ is applicable to foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project.

Tax Audit Due Date​​

A person covered by Section 44AB of the Income Tax Act should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year, e.g., the Tax audit report for the financial year 2022-23 corresponding to the assessment year 2023-24 should be obtained on or before 30th September 2023.​

 

tax audit

 

The tax audit report is to be electronically filed by the chartered accountant to the Income-tax Department. After filing a report by the chartered accountant, the taxpayer has to approve the report from his e-fling account with the Income-tax Department (i.e., at https://www.incometax.gov.in/iec/foportal).

 

Read More: ITR U FILING – NOW FILE ITR FOR LAST 3 YEARS

 

Penalty​​

According to Section 271B of Income Tax Act, if any person who is required to comply with Section 44AB fails to get his accounts audited in respect of any year or years as required under Section 44AB or furnish such report as required under  Section 44AB​, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

 

  • 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.

 

  • Rs. 1,50,000.

However, according to Section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

GST AUDIT BY TAX AUTHORITIES

Sec 65(1): Audit by Tax Authorities 

Any registered person may be audited by the Commissioner or any officer designated by him, pursuant to a general or a specific order, for the time period, with the frequency, and in the manner specified.

Sec 65(2): Place of Conduct of Audit

The officers mentioned in subsection (1) may conduct an audit at the registered person’s place of business or in their office.

Sec 65(3): Intimation

The registered person must receive notice of the audit’s upcoming conduct at least fifteen working days in advance, in the manner that may be required.

The taxable person must receive notice of the audit in Form GST ADT-01 at least 15 days in advance.

 

gst audit
Sec 65(4): Period of Completion

The audit required by sub-Section (1) must be finished within three months of the audit’s start date:

With the proviso that the Commissioner may, for reasons to be recorded in writing, extend the period by an additional period of not more than six months if he is satisfied that the audit in respect of such registered person cannot be finished within three months. Explanation.- For the purposes of this subsection, “commencement of audit” refers to the later of the dates that the registered person or the actual institution of audit at the place of business provides the records and other documents requested by the tax authorities. This audit must be finished within 3 months of the audit’s start date, but the Commissioner may, in certain circumstances, grant an additional extension of up to 6 months. Any such extension must be justified in writing by the Commissioner.

Section 65(5): Auditee’s Responsibility

The authorized officer may demand the registered person perform the following during the audit:

(i) To provide him with the facility he needs to check the books of accounts or other documents as needed,

(ii) To provide any information he may need and offer assistance in order to complete the audit on time.

Sec 65(6): Audit Report 

The proper officer must inform the registered person whose records were audited of the findings, his rights and obligations, and the reasons for the findings within thirty days of the audit’s conclusion. Following the completion of the audit, information, including the audit’s findings, must be given to the registered person in FORM GST ADT-02 within thirty days of the audit’s conclusion.

 

gst audit

 

Sec 65(7): Consequences

Where the audit carried out in accordance with subsection (1) identifies

1. Tax not paid, or
2. Such short-paid, or
3. Erroneously refunded, or
4. Input tax credit wrongly availed or utilized,
5. The proper officer may initiate action under Section 73 or 74.

 

Read More: GST, IT, Companies, PF, and ESI Acts Due Dates: October 2022

In cases where

1. Tax liability is identified during the audit or
2. Input tax credit wrongly availed or utilized by the auditee, the procedure laid down under Section 73 or 74 is to be followed. The audit cannot conclude automatically resulting in a demand. Independent application of mind is necessary for a valid demand to be raised.