India Inc, its auditors and corporate law experts want the government to take a second look at the draft rules of the new company law that requires mandatory rotation of auditors and audit firms including annual ratification from shareholders.

Experts in company law have suggested that it may not be practical for limited number of auditors to audit lakhs of registered companies or for these many companies to rotate auditors every five years.

Instead, rotation of auditors should be restricted to only listed companies and that the proposed cap of 20 company audit per auditor should also be limited to only public companies, experts said.

In the suggestions made to the draft rules on the new Companies Act, 2013, Price Waterhouse said it would like the government to clarify that private companies will be kept outside the cap of 20 companies per auditor.

“It is suggested that only companies listed in India should be subject to firm rotation under Section 139(2),” said Harinderjit Singh, partner, Price Waterhouse.

“In countries where mandatory audit firm rotation operates ? Italy, Brazil and Netherlands — it is applicable only to listed entities or public interest entities. In none of these geographies is firm rotation applicable to private companies or subsidiaries of foreign parents,” he said.

Dolphy D’souza, senior partner in a member firm of Ernst & Young Global said: “Conceded that rotation brings about independence of auditors, but it also increases audit cost, burden for companies and in initial years of the incumbent auditor, increases the risk of non detection of frauds…Therefore in balance, the rotation requirements should not be extended to companies other than listed companies, as public interest in non-listed companies is minimal.”

According to Singh, the Companies Act, 2013 is applicable in its entirety prospectively from the date on which the sections are notified. “However, the rules in this case have made the applicability of the section on mandatory rotation retrospective, which appears to be in contradiction. It is suggested that this requirement is also made prospective in line with the rest of the Act,” he said.

Lalit Kumar, partner in law firm J Sagar Associates said these draft rules will certainly require some more clarity specially on the annual ratification of auditors from shareholders.

?Companies are asking how will this ratification work. If not ratified then current auditors will need to be replaced with new one. This rule may require more clarity,? Kumar said.

Batting for the continuity in auditor-auditee relationship for all class of companies, N Venkatram, managing partner (audit), Deloitte Haskins & Sells said: “The continuous appointment of an auditor for a period of five years under the 2013 Act gives the audit firm more independence and understanding of the auditee which could arguably result in a higher quality of audit than an annual appointment.”

Auditors reporting fraud: The draft rules to the new Companies Act also require auditors to directly report to the government about a fraud or potential fraud in a company where the amount involved or likely to be involved is not less than 5% of the net profit or 2% of turnover of the company for the preceding financial year. ?This rule will make the job of an auditor/audit firm more challenging and difficult,? Kumar said.

Price Waterhouse said the meaning of term fraud is ?wide? and ?ambiguous? in the new law. “In a normal business, there can be allegations, which are at various stages of investigations. Consequently, the reporting requirement for an auditor should only be limited to those frauds which have been investigated and concluded and not merely allegation,” said Singh.

According to D’souza, an auditor cannot be expected to detect all frauds. “Therefore, it should be appropriately clarified that the duty of the auditor to report on the matter would arise only if fraud is identified in the process of audit, carried out in accordance with the auditing standards and the amount involved is material. The auditor should not be made liable in other situations.?