Written by P Raghavan | Updated: Oct 6 2010, 05:16am hrs
Auditor and Audit

Committee Independence in India

By Jayati Sarkar and

Subrata Sarkar

Indira Gandhi Institute of Development Research, WP-2010-020, Sep 2010

The Enron and the Satyam debacles have brought to the fore the need for substantial changes in the regulations on auditor independence and audit committees across the globe. While the US introduced the Sarbanes-Oxley Act to ensure far-reaching changes in regulations, India has sought to introduce changes through the Companies Bill 2009, which incorporates many of the suggestions of the Naresh Chandra Committee (NCC) on audit and governance, and is likely to become a law by the year-end.

But then, how will this Bill comply with the need for reforms in the regulations governing auditor independence A working paper by the IGIDR reviews the governance standards in India and suggests reforms to further strengthen auditor independence. The existing regulations are rather inadequate as the rules do not bar auditors from having close relationships with either the audited company or with key management personnel. There are also no provisions that deal with a cooling off period for audit partners or staff to join audit clients in a senior management position and audit firms can also provide non-audit services to clients.

The study notes that the recommendations of the NCC, most of which were incorporated in the Bill, were in line with international benchmarks but there is still scope for improvement. Particularly significant is the omission of the NCC recommendations that all partners and at least half the audit engagement team be rotated every five years, which was similar to the specifications under the Sarbanes-Oxley Act. And strangely, mandatory rotation is applicable only for government firms, not for private listed companies.

Of major concern, even after the passage of the Bill, will be the issues regarding the independence of the audit committee in terms of its composition and powers of the board to overrule its recommendations. Equally important will be conflict of interest in the auditor- company relationship and audit partner rotation. Any lack of progress on these fronts will seriously limit the effectiveness of auditor independence in corporate governance.