To safeguard investors, MCA mulls stricter audits, hefty fines

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Mar 30 2011, 06:56am hrs
In a sign of its growing apprehension of individual audit firms being hand in glove with company promoters in fudging accounts to the detriment of retail investors, the corporate affairs ministry is working on a set of strict safeguard measures. Among the several options being discussed includes imposing a hefty penalty and debarring the entire firm from conducting any audit practice for a stipulated period if it has been found in repetitive incidents of account fudging.

This is starkly different from the current norms, according to which only the individual auditor is culpable under law and not the audit firm itself.

The government hopes that such a strong deterrent will force audit companies to make their practices more transparent. Since audit firms do not want to take responsibility for the actions of their chartered accountants, a strict provision has to be put in place, a person privy to the details said.

In fact, the ministry is also exploring similar safeguards in other statutory disciplines including cost accountants and company secretaries. For this purpose, it has sent letters to the two bodies the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India for determining the safeguards against erring cost accountants and secretaries.

Following the Satyam scam, the government has tried several options to increase transparency, especially to check any murky relationship that may exist or develop between Indian audit firms and their foreign partners.

In fact, the corporate affairs ministry had recently received a set of recommendations from the high-powered committee of the Institute of Chartered Accountants of India. The institute had urged the government to impose a ban on audit firms for a fixed time period if its auditors have been found in repetitive incidents of breach of law.

The government is not unnecessarily trying to pull up auditors. If we find that only a handful of audit firms have repeatedly been involved in malpractices and there is a trend, then we have to take action, a source said. However, he added that no final decision has been taken, and that the government is open to any suggestions on the matter.

During his tenure, former corporate affairs minister Salman Khurshid spoke out against foreign audit firms on several occasions.

He had repeatedly argued that before the government can give foreign audit firms complete rights to practise in India, they need to start taking responsibility for their actions in the country.