The Companies Act 2013 has introduced
important audit reforms. One of the important reforms is rotation of the
auditor. All listed companies, unlisted public limited companies having paid up
share capital of Rs ten crore or more, all private limited companies having
paid up share capital of Rs twenty crore or more, and all companies having
public borrowings from financial institutions, banks or public deposit of Rs
fifty crore or more are required to rotate their auditor. An individual cannot
continue as an auditor for more than one term of consecutive five years and an
audit firm cannot continue as an auditor for more than two terms of consecutive
five years, that is a consecutive period of ten years. The cooling off period
is five years. The Companies Act allows three-year time for complying with the
provision. Therefore, the provision must be complied by April 1, 2017. The
objective is to enhance the audit independence. This is expected to improve audit
quality resulting in improved financial reporting.
Traditionally companies do not change their
auditors except in exceptional circumstances. In Large number of companies that
are required to rotate the auditor, auditors have already completed more than
ten years/five years of providing auditing service. Those companies will change
their auditor effective from 2017-18.
Local firms dominate Indian audit market. However,
the presence of Big 4 audit firms (Deloitte, PWC, E&Y and KPMG) cannot be
ignored. Big 4 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. Therefore, they provide services through network of local firms. It
is alleged that they flout the rules in order to provide audit and assurance
services. Many foreign investors put a condition that the auditor of their
choice should be appointed. This helps the Big 4 audit firms to grow in India.
Local firms audit 62 per cent of the BSE
five hundred companies. There is an apprehension that many companies that get
their accounts audited by local firms will appoint one of the Big 4 or other
large international professional service network (e.g. BDO, RSM, Grant Thornton
and Baker Tilly) as their auditors. If that happens, the local firms will lose
out. It is reported that large 20 local firms have written to the government to
intervene to protect their interest. On September 30, 2016, the Ministry of
Corporate Affairs has notified constitution of a three member expert group to
look into the complaint that Big 4 are circumventing rules and to find ways to
help local firms.
Most local firms are small and they do not
face any threat from Big 4 and other international firms. They are mostly
located in tier II and III cities and small towns. They provide variety of
services to small companies. They lack aspiration to become big. Big 4 and other international firms engage
members of the Institute of Chartered Accountants of India (ICAI) to deliver
audit and assurance services. In this context, presence of Big 4 firms does not
hurt the auditing profession. Therefore, it is debatable whether there is a
case for government’s intervention to protect local audit firms.
A proposal is taking round that the
government should mandate joint audit with at least one local auditor to create
professional opportunities for local firms. This is unwarranted. This will
increase the auditing expenses. The audit committee of a company should assess
the need for the joint audit and the company should decide whether it should
have joint audit. No rule should be framed to create jobs for a profession,
particularly for one that is matured.
Chartered Accountants are prohibited from
soliciting professional work through advertisement or otherwise. But they can
respond to tenders. The practice of issuing tender for the appointment of
internal auditors is quite common among public enterprises. Such a practice is
not common among private-sector companies. Companies usually do not issue tender
for the appointment of statutory auditors. Tendering is the right method to
search for the right audit firm. This increases the choice and reduces auditing
cost through competition. Companies should not limit their choice to Big 4 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.
