The Companies Act, 2013, has introduced important audit reforms. One of the important reforms is rotation of the auditor.
Important provisions under this reform
- All listed companies; unlisted public limited companies having paid-up share capital of Rs 10 crore or more; all private limited companies having paid-up share capital of Rs 20 crore or more, and all companies having public borrowings from financial institutions, banks or public deposit of Rs 50 crore or more are required to rotate their auditor.
- An individual cannot continue as an auditor for more than one term of five years and an audit firm cannot continue as an auditor for more than two terms of five years
- The cooling off period is five years.
- The provision must be complied by April 1, 2017.
Benefits of this reform
- This is expected to improve audit quality, resulting in improved financial reporting.
- Would give local auditors more leverage, if implemented properly along with some other measures.
Local auditors v/s the Big Four
- Local firms dominate the Indian audit market. However, the presence of the Big Four audit firms (Deloitte, PWC, E&Y and KPMG) cannot be ignored.
- The Big Four are the largest professional service network in the world. They provide audit, assurance, tax, consulting, advisory, actuarial, corporate finance and advisory services. In India, they cannot provide audit services directly.
- It is alleged that they flout rules while providing audit and assurance services. Many foreign investors put a condition that the auditor of their choice should be appointed. This helps the Big Four audit firms to grow in India.
- There is an apprehension that many companies that get their accounts audited by local firms will appoint one of the Big Four or another large international professional service network as auditors.
- Hence, the Ministry of Corporate Affairs had notified the constitution of a three-member expert group to look into the complaint that the Big Four are circumventing rules and to find ways to help local firms.
Should the government intervene?
- Local auditors are mostly present in tier 2 and tier 3 cities and audit 62 % of the companies listed on BSE 500.
- They provide a variety of services to small companies. They lack aspiration to become big.
- Therefore, it is debatable whether there is a case for government’s intervention to protect local audit firms
Way ahead and Conclusion
Chartered accountants are prohibited from soliciting professional work through advertisement or otherwise. But they can respond to tenders.
- The practice of issuing a tender for the appointment of internal auditors is quite common among public enterprises. Such a practice is not common among private-sector companies.
- Tendering is the right method to search for the right audit firm. This increases choice and reduces auditing cost through competition.
- Companies should not limit their choice to the Big Four and other international firms or a few large local audit firms.
- There are local firms that have capabilities to audit large and complex transactions. Search through tendering process would help to identify such firms.
It will be interesting to see how the new rules regarding rotation of auditors will actually impact the auditing profession.
