Instead of a blanket ban on all non-audit services during the cooling off period as originally proposed, the ministry is considering limiting the ban to a list of prohibited services already listed in the Companies Act, the persons said.  

That means, during the cooling off period between statutory audits, the auditor can offer permissible non-audit services to the same client.

These changes in the Bill follow the recommendations of a joint committee of Parliament chaired by BJP MP Sudheer Gupta to take a calibrated and risk-based approach by Centre on the proposed ban on non-audit services and a three-year post-audit cooling-off period. The committee presented its report to the Parliament on August 3.

The ministry had told the committee that it would examine reducing the proposed cooling-off period during which the auditor cannot provide non-audit services to the same client.

The ministry told the committee that “to provide adequate flexibility while ensuring that only such services as may warrant restriction are covered, the words "as may be prescribed" shall be inserted after the reference to ‘any non-audit services’.”

The idea behind implementing a longer and stricter cooling off period was to ensure auditor independence and address potential conflicts of interest arising from providing non-audit services.

“A mandatory three-year ban is necessary to effectively ward off self- review threat and possibility of a trade-off for compromising audit quality. The idea of bringing it down to one year,  if it is to happen is an example of flip-flop, from the government's intent to improve audit quality, under pressure from the industry,” said Ashok Haldia, former secretary, Institute of Chartered Accountants of India (ICAI).

Queries emailed to the ministry of corporate affairs on Tuesday remained unanswered at the time of publishing.

The committee however had flagged that it may unnecessarily restrict legitimate and low-risk professional services, particularly MSMEs and may create uncertainty regarding the services intended to be covered by the restriction. The house panel had said that a three-year cooling off period for auditors would be onerous especially in cases involving group companies, joint audits, mid-term resignation or non-reappointment of auditors.

Currently, there is no cooling off period in the law. However, the Reserve Bank of India (RBI) prescribes a one-year cooling off period for bank auditors. The Comptroller and Auditor General of India requires that a firm which has completed an audit of a ‘Maharatna’ – major profit-making public sector companies – will not be allowed to audit another Maharatna for a period of four years.

Experts feel that a one-year firm-level cooling-off, coupled with partner-level safeguards, enhanced disclosure of post-tenure engagements and robust oversight by the National Financial Reporting Authority (NFRA), would likely deliver better governance outcomes than relying on duration of cooling-off period alone.

“Independence is ultimately strengthened not merely by extending time-based restrictions, but by active supervision of conflicts of interest and accountability for breaches. The objective must be genuine independence, not merely the appearance of it. Getting that distinction right matters more than adding years to a clock,” Shruti Lohia, Partner, AQUILAW.

The Bill is yet to be passed in the Parliament and amendments to it are likely to be tabled in the Winter session.

The usual ‘audit term’ for an auditor is five years, following which it can be reappointed for another five years. Non-audit services prohibited under the Act include internal audit (which are management-led), management services, investment advisory, investment banking, and actuarial services among others.

While industry representatives argue that there are safeguards in place to address auditors’ independence risks – such as oversight by audit committees and restrictions under Section 144 of the Companies Act – NFRA inspections have found conflicts of interest to be a major problem.