Rating of audit companies may get more tangible to check frauds

Audit companies may soon be scored on parameters ranging from employee training and qualifications to client sensitisation and technology adoption. The government is pushing for measurable indicators to reduce the risk of frauds and create a market demand for audit quality, according to senior officials. 

“Many audit firms have already started putting in place quality control mechanisms such as keeping audit and non-audit work separate...We want to bring in measurable indicators for an objective view of audit quality in the country,” a senior government official said. 

The Centre for Audit Quality has already prepared an approach paper for the audit quality maturity model. At the firm level, the AQIs (audit quality indicators) could include the tone at the top which may be gauged based on independent survey of firm personnel, firm’s independence policies, the paper said. At the engagement level, alignment of auditor compensation to audit quality, allocation of hours to timely reporting of internal control weaknesses could be considered. 

The Institute of Chartered Accountants of India (ICAI) has suggested that the model can be recommendatory for one year and that it can be made mandatory for public interest entities thereafter. “Such companies can engage audit firms which meet a certain standard as measured by a score,” said Atul Gupta, a former president of ICAI. 

Industry experts said a framework, modelled on international audit quality indicators, would do well for the profession and the capital markets. 

For instance, Singapore’s Accounting and Corporate Regulatory Authority has listed out eight audit quality indicators including time spent by senior audit team members, average training hours, results of external and internal inspections, staff per partner ratio among others. Similarly, USA’s public company accounting oversight board has come up with 28 potential indicators to assess the audit results, process and professionals. 

“The concept of AQIs has not gained prominence in India.  One has to also appreciate that the India market differs from other developed markets where primarily large firms serve public interest clients.  In India, firms ranging from sole proprietor-ships to partnership firms having two to more than 100 partners, serve public interest clients...Any approach to developing AQIs will require understanding our market, differing stakeholder expectations and profile and capabilities of the audit firms,” said Govind Ahuja, Partner, SR Batliboi and Associates LLP.

In India, this area has not been covered in terms of setting professional standards, although many large firms use audit quality indicators as a parameter to measure and monitor audit quality. 

Experts believe that such a framework could be useful in improving the understanding and confidence in audit quality among investors, government authorities and stakeholders while also fostering competition. 

“In an ideal environment, once an audited report is placed on the table, there should be minimal scrutiny under tax laws, restricted only to special circumstances. Robust audit practices in tandem with evolving times and metrics to gauge audit quality will go a long way in meeting this end,” said Raghavan Ramabadran, Executive Partner, Lakshmikumaran & Sridharan Attorneys. 

The Centre of Audit Quality’s model has also proposed a maturity rating for a firm based on its scores across three broad categories - operations, human resource and practice management. The rating would be at three levels ranging from nascent to those who have made significant adaptation of standards and procedures. 

Experts have suggested that ICAI can work with the government and other stakeholders such as the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI) and industry chambers to seek their inputs for development of AQIs, considering the range of enterprises operating in India. “This will be useful not only in enhancing the audit quality, but also enable small and mid-sized firms to develop scale and size to effectively audit larger enterprises,” Ahuja added.