Accepting a Bank Statutory Audit: Shares, an Overdraft, a Success Fee and a Silent Predecessor

1. Spouse's 400 shares - section 141(3)(d)(i) A relative (spouse is within section 2(77)) holding any security is a disqualification, but Rule 10 of the Companies (Audit and Auditors) Rules, 2014 permits a relative to hold securities of face value up to ₹1,00,000. Here 400 × ₹10 = ₹4,000, so there is no statutory disqualification. That is not the end of it: the Code of Ethics requires a self-interest/familiarity threat assessment, and for a listed bank independence in appearance matters. The cleanest safeguard is voluntary disposal before acceptance, recorded in the independence file.

2. Overdraft of ₹22 lakh - section 141(3)(d)(ii) Indebtedness to the company exceeding ₹5 lakh is an absolute disqualification; there is no materiality defence. The overdraft must be cleared or refinanced with another lender before appointment. If the firm accepts while indebted, it is disqualified, the appointment is bad and the firm must vacate office under section 141(8).

3. Ceiling - section 141(3)(g) The specified number is 20 companies per partner (excluding OPCs, dormant companies, small companies and certain private companies). At 19 the firm has one slot, which the bank would consume. Verify the ADT-1 certification and keep no headroom unexamined; also check RBI's tenure and rotation norms for bank auditors, which are separate from the Companies Act ceiling.

4. Success fee - Clause (10) of Part I of the First Schedule Charging a fee contingent on the results of the work is professional misconduct. A success fee on recoveries from written-off accounts is precisely that, and it would make the firm's own recovery judgements in the audit self-serving. It cannot be cured by disclosure - it must be declined and replaced by a fixed fee in the engagement letter.

5. Valuation of the derivative book - section 144 and the Code Valuing the very book the firm must opine on creates a self-review threat that no safeguard can reduce to an acceptable level, and for a listed entity it falls foul of section 144's prohibition on management-type services. Decline; if the bank needs a valuation, an unrelated firm should do it.

6. Communication with the predecessor - Clause (8) of Part I of the First Schedule Mandatory, and it applies even where the previous auditor resigned. The audit committee's preference is irrelevant. Write to the previous firm, seek the no-objection and the reasons for resignation; the provisioning disagreement is itself a red flag to be planned for. If no reply comes after a registered letter and a reminder, document and proceed.

Conclusion: the firm cannot accept as the file stands. It may accept only after the overdraft is extinguished, the fee structure is rewritten, the shareholding is addressed and the predecessor communication is completed.

A promise of future regularisation is not compliance with section 141(3)(d)(ii) today. Disqualification is tested at the date of appointment and continues throughout the term; accepting now means signing reports while disqualified, which exposes the firm to the appointment being treated as void, to the bank's filings resting on an invalid report, and to disciplinary proceedings under the Chartered Accountants Act. The response should be a short written note to the chair: the firm is willing to act, the fee and non-audit proposals must change, and the overdraft must be closed and evidenced by a nil-balance certificate before the engagement letter is signed. Offer a timeline so the request is not simply refused.

Documentation on file (SA 230):

• the independence questionnaire and the conclusion on each threat, including the ₹4,000 face-value computation for the spouse's holding;
• the overdraft statements and, once cleared, the closure confirmation;
• the written communication with the predecessor and its reply, or proof of dispatch and reminder;
• the advice given to the audit committee and its response;
• the revised fee terms.

The file should record why the firm declined or deferred, not merely that it did - a later quality review or Peer Review Board inspection will test exactly that reasoning.

No. Clause (10) bites on any professional employment where the fee is contingent on findings or results, and the permitted exception relates to insolvency-type work, not to a review designed by the same firm that audits the loan-loss figures. Splitting the arrangement into two letters does not change substance: the special review's findings feed directly into provisioning judgements in the audit, and a fee tied to recoveries gives the firm a financial interest in a conclusion it must reach independently. It is a self-interest threat of the highest order and also a self-review threat.

The firm should decline, explain the clause in writing, and offer a fixed fee based on time and seniority. If the bank insists, the firm should consider whether the client's attitude creates a pressure threat under SA 240 (management attempting to influence the auditor) that needs to be communicated to those charged with governance and factored into the fraud risk assessment.