Practice structure
Why firms keep audit and advisory apart — and how they structure for it
Ask why a firm runs two entities and the short answer is independence. An auditor has to be — and be seen to be — independent of the entity being audited, and the rules put hard limits on doing both the audit and other work for the same client. Structuring around that isn't bureaucracy; it's what keeps the audit opinion worth anything.
Here is the basis for the separation, and what it means for how a practice is organised.
The independence principle
Independence is the prerequisite ICAI's Code of Ethics places before every attest engagement. The concern it guards against includes the self-review threat — an auditor checking work the same firm produced can't examine it with a fresh, sceptical eye — and the advocacy and self-interest threats that come from being too entangled with a client's other affairs.
It's not only a rulebook matter. An audit opinion carries weight precisely because the person signing it had nothing to gain from the answer. Lose the independence and you lose the value of the signature.
What Section 144 actually prohibits
Section 144 of the Companies Act, 2013 bars a company's statutory auditor from rendering certain non-audit services to that company, its holding company or its subsidiary. The prohibited list includes accounting and book-keeping, internal audit, design and implementation of financial information systems, actuarial services, investment advisory and investment banking services, rendering of outsourced financial services, and management services.
Other non-audit services can be provided only where the Board or Audit Committee approves them. A later amendment also introduced a cooling-off period restricting outgoing auditors from providing such services after their tenure. The effect is a clear line: you cannot be both the auditor and the provider of those services to the same audit client.
How firms structure around it
The practical response is to keep the audit practice and the advisory or tax practice separate — commonly as distinct legal entities, or at least clearly separated teams and engagement records — so the firm can offer the full range across its client base without any one client being served in conflicting capacities.
That separation has to hold in the day-to-day, not just on paper: the people, the working papers, the billing and the client records for the audit entity need to be genuinely distinct from those of the advisory entity.
What it asks of a firm's systems
If the entities are separate, the software running the practice has to respect that. Tasks, clients, team and billing should be scoped to the entity doing the work, with partners able to see across entities and staff seeing only their own — so the separation the rules require is enforced in the tool, not left to everyone remembering which hat they're wearing.