Why ICAI’s audit limit is misguided and outdated

The origin of mandating tax audits dates back to the eighties.

By Prashant Narang and Surya Prakash BS

From FY 2027, each partner in a CA firm will be allowed to sign no more than 60 tax audit reports a year—a proposal the Institute of Chartered Accountants of India (ICAI) says will “improve audit quality and manage workload.”

Two fundamental questions arise: first, on what legal and empirical grounds has the ICAI set this ceiling? Second, should tax audits by CAs remain mandatory at all?

To address the legal issue first: the Supreme Court’s ruling in Shaji Poulose v. ICAI (May 2024) upheld the ICAI’s audit cap, but it did so by effectively elevating internal guidelines from 2008 to statutory status. This interpretation is troubling because the guidelines were neither notified in the Official Gazette nor laid before Parliament, contrary to the explicit requirements of Section 30B of the Chartered Accountants Act. Indeed, a regulation imposing penalties and potentially threatening livelihoods cannot simply slip into law as an internal circular, however well-intentioned. When the ICAI Council declares the 61st audit “professional misconduct,” it has essentially appropriated a legislative function. Such stealth legislation is procedurally flawed, bypassing democratic scrutiny and accountability.

Moving from legality to substance, the rationale behind the 60-audit ceiling further weakens under scrutiny. ICAI’s internal surveys reveal that the average CA partner undertakes only 14–15 audits annually—barely a quarter of the proposed limit. This data contradicts the argument that a numerical ceiling safeguards audit quality by preventing excessive workloads. Furthermore, neither ICAI nor the Income Tax Department has produced evidence linking higher audit counts with poorer audit outcomes, such as increased adjustments during tax assessments. Even the CAG’s performance audit from 2014, frequently cited by ICAI, offered no proven causal link between audit volume and audit quality. Thus, the number 60 appears more arbitrary than evidence-based—convenient for administrative ease rather than rooted in a robust public-policy rationale.

Such arbitrary ceilings are reminiscent of an economic mindset India abandoned decades ago. In most sectors, quotas limiting production or service provision have been dismantled to foster competitiveness, transparency, and efficiency. Imposing such quantitative limits on the professional activities of CAs represents an antiquated control-oriented approach, out of step with modern regulatory practices. Better alternatives exist—such as unique document identification numbers, random peer reviews, and transparency-driven performance dashboards—to ensure audit quality without unnecessarily restricting market freedom.

Finally, we must question the deeper rationale underlying compulsory third-party attestation in tax compliance. The Comptroller and Auditor General of India, in its Report No. 9 of 2019 (Direct Taxes), highlighted that approximately 1.18 lakh out of the 7.13 lakh corporate tax returns filed during FY 2016–17—about 15%—were subjected to scrutiny assessments, frequently resulting in adjustments. This scrutiny rate raises critical questions: Are compulsory tax audits under the existing norms truly delivering high-quality, reliable outcomes? If a significant proportion of audited returns continue to require adjustments upon scrutiny, one must question whether mandatory third-party attestations are achieving their intended purpose or merely duplicating efforts and costs.

The origin of mandating tax audits dates back to the eighties, an era characterised by manual documentation and limited state capacity. Today, however, the digital transformation in tax administration—including GST e-invoicing, sophisticated TDS tracking, and AI-powered scrutiny—provides tax authorities with unprecedented visibility into taxpayer transactions without outsourcing their gatekeeping role. While professional advice from CAs undoubtedly offers value, mandating third-party audits as a condition of compliance transfers state responsibility to private hands, imposing unnecessary financial and compliance burdens on over eight million businesses annually. Taxpayers already face direct accountability for accuracy in their returns, backed by stringent penalties and statutory obligations; mandatory certification adds little meaningful benefit in today’s digitised context.

Regulatory legitimacy rests on transparency, empirical justification, and proportionality. ICAI’s guidelines—and the proposal to institutionalise the 60-audit ceiling from FY 2027—fail each of these tests. Unless Parliament steps in to re-examine these rules critically, demanding robust evidence and, if necessary, legislating afresh, the ceiling will persist as little more than an arbitrary relic from India’s quota-licence past, cloaked misleadingly in the rhetoric of reform.

(Prashant Narang is Deputy Director - Research and Programs at the TrustBridge Rule of Law Foundation, Delhi. Surya Prakash B S is Programme Director at Daksh, Bengaluru.)

Views are personal and do not represent the stand of this publication.