CA Sameer, a Chartered Accountant in practice, has been appointed the statutory auditor of XYZ Ltd. for the financial year 2025-26. While finalising…

Clause (10) of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he charges or offers to charge, accepts or offers to accept, in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings or results of such employment, except as permitted by the Regulations. Further, Regulation 192 of the Chartered Accountants Regulations, 1988 restricts a member in practice from charging fees based on a percentage of profits or fees contingent upon the findings or results of professional work, subject to the exceptions prescribed therein. In the case of XYZ Ltd.: The fixed statutory audit fee of ₹8 lakh, by itself, is not objectionable. However, the additional fee of 2% of the increase in profit resulting from audit adjustments is directly linked to the findings/results of the statutory audit. The amount of fee would depend upon the extent to which the audit adjustments increase the reported profit. Accordingly, such an arrangement is not permissible and would attract the prohibition contained in Clause (10) of Part I of the First Schedule, read with Regulation 192. In the case of ABC Ltd.: The litigation-support assignment is a non-assurance service provided to a non-audit client. The proposed contingent fee in respect of such service is covered by the exception permitted under Regulation 192, subject to fulfilment of the conditions prescribed therein. Therefore, charging a fee contingent upon the successful outcome of this non-assurance assignment would not constitute professional misconduct under Clause (10). Conclusion: The additional fee linked to the increase in profit from the statutory audit of XYZ Ltd. is not permissible. However, the contingent fee proposed for the litigation-support assignment for the non-audit client ABC Ltd. is permissible under the applicable exception in Regulation 192, subject to its prescribed conditions.