With more disclosures, auditors may seek higher compensation for their work

Auditors may seek higher compensation for their work, with the latest rules significantly increasing the number of disclosures to be made in audit reports from this financial year itself, industry sources said. 

“The implementation of the new guidelines will involve higher fee, even though the negotiations have already happened for this year,” a senior executive with one of the big four network firms said. 

The government notified the Companies (Auditor’s Report) Order, 2020, on Wednesday. It more than doubled the number of disclosures to be made by auditors to improve financial discipline. 

Audit companies are entitled to a higher fee than stipulated if there are changes in the work. The request for a fee hike is then considered by the company’s audit committee, which consists of its board of directors. The rules will apply to audit reports for the financial years commencing on or after April 1, 2019.

An executive with one of the Big Four audit companies, said: “We might ask for a slight increase but since fee has already been decided, we are not expecting an increase at least for this year.”

However, the demand for change in fee will be on a case-to-case basis. “Larger companies will witness the most impact because of the scale of work involved,” said Ankit Singhi, partner, Corporate Professionals. 

Audit companies are still assessing the increase in their workload because of the new rules and the rise in the fee that they would demand. 

While some of the changes, such as commenting on financial ratios, do not increase the job of an auditor by much, there are several new disclosures which would require extra work. Auditors now have to verify quarterly returns or statements filed by a company with banks or financial institutions and ensure they are in agreement with the books of account of the company, with respect to sanctioned working capital limits and inventory. 

A new format for reporting details of immovable properties not held in the name of the company is now far more exhaustive than before and requires auditors to put in extra work. Not only do they have to furnish details, such as gross carrying value, name of the person it is held by, and the period of ownership, but also state the reason for the asset not being held in the name of the company. 

The rules also require companies to provide much deeper details of the workings of their businesses. Auditors will be obliged to qualify any instance of misinformation or non-cooperation by the company in its final assessment. 

Expanding the scope of audits beyond its present limits, auditors will now also have to specify the aggregate amount of loans taken without any terms for repayment, its percentage to the total loans granted, and loans granted to promoters and related parties.

Auditors also have to keep in check any ever-greening of loans by filing disclosures on whether the company has taken any funds from any entity to meet the obligations of its subsidiaries or joint ventures and if it has raised loans during the year on the pledge of securities held in such entities. 

With auditing profession under the scanner and two of the Big Four stopping non-audit services for their audit clients, there is also pressure on the way audit companies make money. A recent consultation paper by the corporate affairs ministry has raised concerns around the issue of remuneration, which is decided by the management of the company. “The reliance on clients’ fee may affect the independence of an auditor,” the paper has said.