Putting in place stringent regulations for corporate governance, the new Companies Bill prescribes harsh measures for auditing firms and their partners. According to the amended legislation, if partners of an audit firm are found involved in a fraud or abetting or colluding in any fraud, they will be penalised under the law. The earlier legislation lacked such penalty specifically for auditing partners.
While the exact amount of the auditors’ liability will be notified as part of the rules to be notified by the ministry of corporate affairs, industry sources suggest it is expected to be hefty.
According to experts, the idea is to make auditors accountable for their job and promote good accounting practices.
“The investors often make investments based on remarks of the auditor. The auditor must, therefore, be responsible if investors lose any money because of auditor recommendations. This shall ensure the auditors be more vigilant and accountable in their conduct in performance of its duties,” said Pavan Kumar Vijay, managing director, Corporate Professionals.
The amended Bill also mandates every company to appoint an individual or a firm as an auditor at its first annual general meeting (AGM). The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter, till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM.
According to the changes, individual auditors are now required to be rotated every five years and audit firm every 10 years in listed companies and certain other classes of companies, as may be prescribed.
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Earlier, there were no such clauses and in case of irregularities, only disciplinary actions were taken against auditors and the auditing firm by the Institute of Chartered Accountants of India, said Vijay.
While the moves are seen to favour investors and stakeholders, there are also concerns that the law threatens to over-regulate the auditing community and this may bring forth various challenges, such as capacity constraint and inconsistency.
“There is already adequate regulation in the law and over-regulation may destroy the industry. An auditor is into a public service and he should be able to function without fear,” says N Venkatram, managing partner (audit), Deloitte Haskins & Sells.
Although the legislation was long awaited, some experts feel the government should not have taken such reformative steps at once and should have evaluated regulations over a period of time, as there are not too many audit firms in the country. “I am glad to see the Bill go through. While provisions like those on rotation of directors and auditors are welcome, they should first be applied to a small subset of the 8,000 listed companies, and based on experience extended further,” said Vishesh C Chandiok, national managing partner, Grant Thornton India LLP.
According to Venkatram, there are only around 5,000-7,000 accounting firms in the country and rotation of firms may pose a challenge for corporates going forward.