Shareholders may get power to sack auditors

Written by Ashish Sinha | Sandip Das | New Delhi | Updated: Jun 14 2012, 09:26am hrs
Shareholders of listed firms may get real authority to terminate the services of statutory auditors who they find errant or complacent, if the government accepts a key recommendation of the parliamentary standing committee vetting the Companies Bill, 2011. According to sources, the panel feels that a listed companys shareholders should get a chance at each of the firms annual general meetings (AGMs) to endorse the continuation of the auditor. This means that if the shareholders are, for reasons assigned by them, not content with the auditors performance, they can force the company board to sack the firm.

The standing committee has recommended such need-based rotation of auditors at shareholders instance as a mandatory provision to be included in the Bill. The idea is to strengthen the independence of audit firms. The government intends to push for the Bills passage in the monsoon session.

As per the Bill, in the case of listed companies, an individual as auditor cannot have a term of more than five consecutive years. As for audit firms, the maximum tenure is proposed to be fixed at two terms of five consecutive years each. The standing committee doesnt want these maximum tenures to be cut, but would insist that the AGM be given real powers to remove the auditor.

Technically, even now the statutory auditors are appointed after shareholders approval of listed firms, but since this doesnt have legal backing, in practice the company boards take the call, thanks to their voting powers.

While the government wanted a five-year term (which cannot be interrupted) for the auditors, many members felt otherwise. Our suggestion of auditors approval by the companys AGM every year was accepted by the government, a panel member told FE, on condition of anonymity. This means that every listed company will now be required to obtain shareholders consent every year in order to continue with its auditors.

The panel has finalised its views and is expected to submit its report to Lok Sabha Speaker Meira Kumar in a day or two.

Experts said for chartered accountants and audit firms, this provision could come as a big dampener if it becomes law. Corporate law experts and members of the auditors community that FE spoke to did not question the merit of the proposal, but stressed on the need for capacity-building to make the proposal (of mandatory rotation of auditors and the proposed shareholder veto) work.

"Conceptually, the rotation of auditors is a good idea but instead of rotation of audit firms, there should be provisions for the rotation of audit partners within an audit firm to start with. The joint-auditor concept could also be implemented, which would help two audit firms big and small to come together to audit companies. This would let the big firm to do the hand-holding job for the smaller one and help capacity-building. Once a god pool of professional auditors are created (which could take five to six years), rotation of audit firms can be made mandatory," TN Manoharan, past president of the Institute of Chartered Accountants of India (ICAI), told FE. "Annual (removal) of auditors, especially by shareholders, should be done in an exceptional case as not every shareholder can be apprised of factual matters."

According to Ved Jain, another past president of ICAI, the rotation of audit firms should be done in a period of three to five years. I am in favour of rotation of auditors every three years," Jain said.

The panel is learnt to have endorsed the provision prescribing liabilities for auditors and extending them to audit firms as well.

However, the panel felt that it would not be 'practical' to make it mandatory to have woman directors on company boards. "It was felt that there should be a gradual change in the appointment of women directors on companies boards and no one should be forced to do it," the panel member said. The Bill states that one woman director will be compulsory for firms.

However, if any changes are made to the Bill, it will require the Cabinet's approval before moving ahead, said a senior government official. Sources said the parliamentary panel has suggested a clutch of changes in the Bill, making it a tough for the government to ensure its passage in the monsoon session of Parliament.

Another significant difference between the house panel and the government's Bill was on the utilisation of mandatory corporate social responsibility (CSR) funds. The panel suggested the use of CSR funds for local area development. "However, this was rejected by the corporate affairs ministry stating that the CSR concept was new and it should be given some time before introducing changes," said another member of the house panel.