Risk firms peeved over new audit norms

Insurance companies are up in arms against the Insurance Regulatory and Development Authority's (Irda) move restricting auditing firms to carry out audit of only two insurers, and that too on a joint basis. Moreover, insurance companies are also bound by the Irda regulations to rotate auditors every four years.

There are 14 life insurers and 13 non-life insurers, most of them having foreign partners and one reinsurer - the General Insurance Corporation of India. Going by the Irda diktat, the Big 4 accounting firms will be able to audit only eight of these insurers.

The four, Deloitte, KMPG, Ernst & Young and PricewaterhouseCoopers, control 80-90 per cent of audit business worldwide.

Global insurance companies having joint ventures in India today have one of the Big 4 undertaking their audits globally, and continue this practice in the country as well. Each of the Big 4 audit 7-8 insurance companies at least.

"Considering the size of insurance companies and their needing to conform to global practices, it is questionable whether small accounting firms would be able to live up to the rigour of the auditing exercise," said Suresh Subramanian, head audit, KPMG.

Prudential Plc, for instance, listed on stock exchanges in the US and the UK, is required to meet the US GAAP and the IFRS accounting norms. The Big 4 international auditing firms have also taken up the matter with the Indian Institute of Chartered Accountants.

"The basic right of appointing an auditor is that of shareholders, as this gives them the comfort that their capital is safe," said a senior industry official. The recently introduced regulations that come into effect on April 1, 2006, takes away shareholders' right, he added.

"The new guidelines prove to be challenging as Aviva today hires Ernst &Young to undertake its audit. Considering the scale of operations, complex nature of these audits and need for adequate infrastructure, the new guidelines are not sensible," said Stuart Purdy, CEO Aviva.

If the insurers manage to hire the four, it could end up bad news for policyholders, said the CEO of a Mumbai-based life insurance company having a UK-based foreign partner.

Insurers will be forced to incur higher auditing charges, as auditing of the company would be duplicated, with one of the Big 4 undertaking some audit of the entity in order to meet global shareholders' demands, the CFO added.

"This is as the Big 4 cannot rely on the audit carried out by any of the other auditing firms. This rule is unique to India and unique to the sector," he added.

In the banking sector, the Reserve Bank of India allows a single auditing firm to carry out an audit of four foreign and four private sector banks.

RBI also does not insist on joint audits. One of the country's leading private sector bank, with its Rs 1,50,000-crore balance sheet uses only one auditor.

This is even as its group life insurance company with a far smaller balance sheet size of Rs 4,000 crore is mandated by the Irda to appoint two auditors. "Even Fortune 500 companies globally have one auditor," said a senior partner of one of the Big 4.

The new auditing norms that come into effect stipulate that one audit firm cannot undertake audit of more than two insurance companies; there has to be rotation of joint auditors; and each insurance entity needs to have two auditors on a joint audit.