Clause explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause (8) of Part I of the First Schedule makes it professional misconduct for a chartered accountant in practice to accept a position previously held by another chartered accountant, or a certified auditor under the Restricted Certificate Rules, 1932, without first communicating with him in writing.
Why the rule exists — and what it is not
The Code is explicit that professional courtesy alone is not the major reason. The underlying objective is that the incoming member should have an opportunity to know the reasons for the change, in order to:
- safeguard his own interest;
- safeguard the legitimate interest of the public; and
- safeguard the independence of the existing accountant.
"It is not intended, in any way, to prevent or obstruct the change."
The Code is equally clear on the client's side: every client has an inherent right to choose his accountant and may, subject to statutory requirements for companies, make a change whenever he chooses, whether or not the reasons are good and valid. Changes commonly occur on a change of business venue, on the retirement or death of the partner who handled the affairs, on a clash of temperaments, or on genuine dissatisfaction. In such cases the Code says the retiring auditor should always accept the situation with good grace.
The three professional reasons for not accepting
| Reason | Effect | |
|---|---|---|
| (a) | Non-compliance with sections 139 and 141 of the Companies Act, 2013, as covered by Clause (9) of Part I of the First Schedule | Accepting is professional misconduct |
| (b) | Non-payment of undisputed audit fees by auditees, other than a sick unit or a company under insolvency resolution with an RP appointed, for statutory audit under the Companies Act, 2013 or other statutes | Accepting is professional misconduct |
| (c) | Issuance of a qualified report | A judgement call — see below |
The Code says expressly that in the first two cases an auditor who accepts the audit would be guilty of professional misconduct.
Fee disputes versus undisputed fees
The distinction is precise and worth stating carefully:
- A dispute as regards fees may be the very reason the auditor was changed. That does not constitute a valid professional reason for refusing the audit.
- But where undisputed audit fees for a statutory audit remain unpaid, the incoming auditor should not accept the appointment unless such fees are paid.
- For other dues, the incoming auditor should, in appropriate circumstances, use his influence in favour of his predecessor to have the dispute settled.
"Undisputed audit fee" and "sick unit" carry the definitions given in the Guidelines on Ethical Issues, 2026: the provision for audit fee in accounts signed by both the auditee and the auditor, along with applicable taxes and any expenses incurred in connection with the audit; and a unit registered for not less than five years with accumulated losses equal to or exceeding its entire net worth.
The Code provides a practical route. Where the previous auditor is not available to accept payment of undisputed audit fees and it is not otherwise possible to transfer the payment electronically, the incoming auditor may advise the client to purchase a demand draft for the amount of the retiring auditor's undisputed fees, and may accept the assignment after verifying it. It then becomes the incoming auditor's duty to ensure the payment reaches the retiring auditor at the earliest possibility — the draft is not the end of the obligation.
The qualified report case
Here the incoming auditor must exercise judgement:
- He may accept if satisfied that the retiring auditor's attitude was not proper and justified.
- He should refuse if he feels the retiring auditor qualified the report for good and valid reasons.
The Code adds a passage that deserves to be read in full by anyone tempted to take the work:
"nothing will bring the profession to disrepute so much as the knowledge amongst the public that if an auditor is found to be 'inconvenient' by the client, he could readily be replaced by another who would not displease the client and this point cannot be too over-emphasised."
The correct procedure on a change of auditorship
- Ask the company whether the retiring auditor has been informed of the intention to change.
- If yes — address a communication to the retiring auditor.
- If no, and the client will not make the first move — ask the client the reason for the proposed change.
- If there is no valid reason for the change, "it would be healthy practice not to accept the audit".
- If the member does decide to accept, he must address a communication to the retiring auditor.
The purpose of the communication is to ascertain whether circumstances exist warranting non-acceptance — for example whether the previous auditor was changed for having qualified his report, or wished not to continue because of something inherently wrong with the administration of the business. The retiring auditor may disclose the condition of the accounts or the reasons that impelled the qualification. The incoming auditor must consider those facts carefully and, if he accepts, take the information into account while discharging his duties.
The retiring auditor's own duty
On a request from the incoming auditor for known information about facts of which, in the retiring auditor's opinion, the incoming auditor needs to be aware before deciding whether to accept, the retiring auditor shall provide the information diligently.
The Code recognises that sometimes the retiring auditor fails to respond without justifiable cause except a feeling of hurt at the change. So that this does not create a deadlock, the incoming auditor may act after waiting for a reasonable time for a reply.
The Council has taken the view that mere posting of a letter under certificate of posting is not sufficient to establish communication unless there is some evidence that the letter in fact reached the person communicated with. A chartered accountant who relies solely on a letter posted under certificate of posting does so at his own risk. Use a mode that produces delivery evidence — registered post with acknowledgement due, courier with proof of delivery, or email with a delivery or read confirmation — and keep it on the acceptance file.
Acceptance checklist
- Communicate in writing, and before accepting — the clause says "without first communicating".
- Use a mode that gives evidence of receipt; certificate of posting alone is not enough.
- Ask specifically about undisputed statutory audit fees, including taxes and expenses.
- Distinguish a fee dispute (not a bar) from undisputed unpaid fees (a bar).
- Check the sick unit and insolvency resolution exceptions on their exact terms.
- Where a qualified report was issued, ascertain the full facts before deciding.
- Confirm compliance with sections 139 and 141 of the Companies Act, 2013.
- If the retiring auditor does not respond, wait a reasonable time and document the wait.
Common mistakes
- Communicating after accepting. The clause requires it first.
- Relying on certificate of posting.
- Treating any unpaid amount as a bar, or conversely ignoring undisputed audit fees.
- Accepting where the predecessor qualified the report for good reasons.
- Calling a three-year-old loss-making company a sick unit.
- Failing to follow through on the demand draft actually reaching the retiring auditor.