Top professional services firms have sought clarification from the Securities and Exchange Board of India (Sebi) regarding its recent ESG assurance regulation, which stipulates that the assurance provider or its associates must not sell products or offer any non-audit/non-assurance services, including consulting, to the listed entity or its group entities.
ESG refers to environment, social and governance.
The firms provide a variety of permissible and non-conflicting non-audit services like tax, compliances and other advisory services to major companies.
The Sebi notification on July 12 said, “The listed entity shall ensure that there is no conflict of interest with the assurance provider appointed for assuring the BRSR Core. For instance, it shall be ensured that the assurance provider or any of its associates do not sell its products or provide any non-audit/non-assurance related service, including consulting services, to the listed entity or its group entities”.
The assurance players say the Sebi regulation is overly strict and it prohibits Business Responsibility and Sustainability Report (BRSR) Core assurance providers from offering permitted services under Section 144 of the Companies Act, 2013.
Section 144 encompasses what non-audit services, e.g., accounting or investment banking services or management services, an auditor or audit firm is not allowed to provide, either directly or indirectly, to the company or its holding company or subsidiary company. A permissible service can be provided with an approval by the audit committee/board of the company.
So, as a statutory auditor of a company, the firm may offer non-audit services without conflicts. However, as per the Sebi regulation, an auditor cannot provide even a non-conflicting and permissible non-audit service, allowed under Section 144, to the same client if conducting an ESG assurance. This limitation may create capacity and other issues,” said Kaushal Kishore, partner, BSR & Co, a KPMG licensee.
ICAI's Code of Ethics clarifies that assurance services demand independence and conflict assessment limited to the subject matter within the company, not extending beyond.“Extending that to the group makes it overly restrictive’,” said Kishore.
According to Jamil Khatri, co-founder of Uniqus Consultech, the Sebi circular allows room for interpretation but also brings attention to a matter that is currently under global discussion.
“Not just in India but globally too there is a debate on whether statutory auditors or specialised consultancy agencies with expertise in climate-related data should be responsible for conducting such audits,” he said.
The matter demands prompt attention because Sebi has decided to implement the initial ESG audit process gradually, starting with the top 150 companies in FY23-24.
Yogesh Sharma, deputy managing partner at BDO, said top professional services firms do offer to their audit clients permitted non-audit services such as certain tax compliance services and while it may not be the intent of the circular, it needs to be clarified that restrictions are only for ESG advisory services and not extending to all non-audit services. “With the regulations already in effect for the top 150 companies, auditors who may be asked to provide assurance under the circular, and have been providing permitted non-audit services, need to respond to their clients appropriately,” he said.
But some chartered accountants feel that the Sebi regulation will lead to more equitable distribution of work. “By implementing such restrictions, professional opportunities can be diversified among various experts, encouraging specialisation and equitable distribution of work,” said Paras Savla, partner, KPB & Associates.
Also confusing is the word “associate” used by Sebi in its notification.
Source : Economic Times
The top multinational professional services firms like EY, KPMG and PwC usually operate in India through a bunch of affiliate firms, which are legally separate entities, and given the wording of the Sebi notification, these affiliates might also be excluded automatically as the top firms already provide extensive services to top listed companies.
Sebi has also not yet specified a framework for ESG assurance providers, comprising a diverse group of professionals, who are capable of offering a variety of assurance services in this domain. The Institute of Chartered Accountants of India (ICAI) has released two standards—SSAE 3000, Assurance Engagements on Sustainability Information, and SSAE 3410, Assurance Engagements on Greenhouse Gas Statements—which focus on providing assurance for an entity's sustainability information, including the assurance of the BRSR.
But that applies only to chartered accountants who are offering assurance services and not to cost accountants, or company secretaries, etc who can adhere to certain principles or frameworks, currently and widely available on this subject and offer assurance services.
Experts said that a potential concern arises over the adequacy of work for assurance providers if their scope of activities is restricted. With limitations on certain services, there might be questions about the sustainability of their business and the potential impact on their overall operations and revenue streams.
“It is essential to strike a balance that ensures a competitive market while also addressing the practical implications for professionals in the field. Finding the right equilibrium is crucial to maintain both the quality of ESG reporting and the sustainability of assurance provider businesses. Regulatory bodies must carefully consider these factors while formulating and implementing such restrictions to achieve the desired outcomes,” said Savla.
Industry leaders say that Sebi’s intention might be to make sure that firms that provide ESG advisory and implementation services don’t end up doing assurance work too. “To avoid conflicts, the recommendation is to ensure that one entity doesn't handle both advisory and assurance roles simultaneously. This separation guarantees unbiased and objective evaluation,” said Kishore.