India is one of the first few countries to end crony auditing by making it mandatory for companies to rotate auditors every 10 years. This will enhance the integrity of the audit process and go a long way in improving investor perception about the quality of financial reporting by the companies.
Section 139 of the Companies Act, 2013, which makes it mandatory for audit firms to be changed, is applicable from April 1, 2014, on a retrospective basis (the existing term of the current auditors will be taken into account for computing the overall tenure) but provides a three-year window to comply with the new rule.
But this has not been really greeted with cheers as it leaves more apprehensions than assurances. Experts are divided on the question of its impact. While some see the new rules ushering in a significant consolidation in the profession of auditing, others think it could spell trouble for some firms. But one thing is definite, that auditor rotation will break the monopoly of the big four?Deloitte, PricewaterhouseCoopers, EY (formerly Ernst & Young) and KPMG.
The haste in notifying the provisions in bits and pieces should have best been avoided as big corporates need time for eventual transition. Companies complain that any new auditor needs a couple of years to understand a company and the complexity of its business, and till then audit process may suffer.
Even chartered accountants (CAs), cost accountants and company secretaries have opposed this. While CAs are worried about increased responsibility and accountability under the new Act as joint audits would force one to take responsibility for the other?s faults, company secretaries are up in arms as they claim they would be rendered jobless as their requirement in private companies has been scrapped. Cost accountants feel the scope of their work has been curbed. Companies, on the other hand, feel that having joint auditors would not only increase expenses but also make coordination between them difficult.
The reasoning provided by lawmakers was to end the cosy relationship that companies share with their auditors. The accounting fraud at Satyam, the biggest corporate scam, sharply brought to light the cracks in accounting companies practised till now. The Reebok India case soon followed, strengthening the belief that companies share a cosy arrangement with auditors and it is against this backdrop that works on the Companies Act, 2013, began.
Lawmakers expect the new rules to enhance auditor independence and audit quality. That is evident in some of the other sections of the new Act that enhance the responsibilities of board of directors, audit committees and those of independent directors. In addition to listed companies, several unlisted companies are also covered by the rotation requirement based on paid-up capital or public borrowings. Individual auditors can audit a company?s accounts for a maximum of five consecutive years, and audit firms for a maximum of 10 consecutive years. Reappointment of the same auditor or audit firm can made only after a break of five years.
Globally, auditor rotation continues to be a subject of much debate, but a broader consensus seems to be emerging on the importance of auditor rotation in ensuring audit independence and objectivity. The corporate affairs ministry is yet to notify the final rules for cost audit, thus leading to confusion among professionals, with few of them advising clients to follow the old rules for the time being.
indu.bhan@expressindia.com