Ever since the new Companies Act has become law, auditors are a worried lot. The Act has imposed several liabilities and restrictions on an auditor's functions, which is likely to hurt the growth of the profession.
Among the many issues, the penalties for non-filing and other compliance requirements have gone up manyfold. But what is even more worrying for the auditor is that a class-action lawsuit can be initiated against them by shareholders and concerned parties for losses due to misstatement in the audit report. Auditors are worried that class-action lawsuits could increase their liabilities and nearly wipe out an audit firm.
Another big worry for auditors is that even if any one of the partners has made a mistake or misrepresentation in the audit report, the entire firm could be debarred from carrying out their duties. Says Dolphy Dsouza, partner, EY: "It's really overdone from an auditor's perspective."
Auditors have to report on a material fraud that is about five per cent of the net profit, even the ones happening within 30 days of coming to an auditor's notice to the central government. They have to report on foreseeable losses on a derivatives contract, which auditors say, is very difficult to calculate if it's of a complex nature.
The apprehension is that the Act will increase the auditors' workload considerably. Also, they have to take indemnity insurance against third party liabilities, which is going to be highly expensive, spurring the fear that only the larger firms will be able to afford higher insurance costs.
Auditors are also prohibited from proving non-audit services such as consultancy including investment advisory, investment banking and management services. Above all, the overriding fear is that auditing will now become high cost and very conservative, which will dissuade new professionals from joining the profession.
But the worse part is that the new auditors can re-state the accounts of the old auditors, if they are not convinced that the old accounts are authentic. A restating of accounts will bring its own set of problems as the earlier auditor will then be liable to litigations, penalties and long-winding explanations of the accounting standards that were used.
There are other apparent problems. A partner can now do only 20 audits per months, without any distinction between public and private companies. Auditors fear that this reduces the amount of work that they can take and increases their costs.
Auditors have for long have set up management information systems that aims to provide company management with crucial information on business growth. This will see the revenues of audit firms declining. Auditors are also restrained from providing such services to any other group firm, as this will altogether bar them from auditing any of the group firms.
Another bone of contention is about a new whistle blower policy. An auditor should immediately inform the government if he believes there are reasons the officers or employees of a firm have committed a fraud. A mere allegation or suspicion will now have to reported to the government. "As a profession we do not have any guidance as to how we can do this, and what can constitute a fraud," says Harinderjit Singh, partner, Pricewaterhouse Coopers.
Among the many issues, the penalties for non-filing and other compliance requirements have gone up manyfold. But what is even more worrying for the auditor is that a class-action lawsuit can be initiated against them by shareholders and concerned parties for losses due to misstatement in the audit report. Auditors are worried that class-action lawsuits could increase their liabilities and nearly wipe out an audit firm.
Another big worry for auditors is that even if any one of the partners has made a mistake or misrepresentation in the audit report, the entire firm could be debarred from carrying out their duties. Says Dolphy Dsouza, partner, EY: "It's really overdone from an auditor's perspective."
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Besides, a new National Financial Regulation Authority, which will be set up to oversee financial standard compliance can debar an audit firm for 10 years from doing an audit of the firm. Auditors are also required to report on internal controls that is required for the orderly and efficient conduct of business. Auditors also have to report on whether those transactions will adversely impact the company for even propriety decisions that the management takes like a merger or any other financial transaction. Says Dsouza: "There are no similar precedences anywhere in the world".
Auditors have to report on a material fraud that is about five per cent of the net profit, even the ones happening within 30 days of coming to an auditor's notice to the central government. They have to report on foreseeable losses on a derivatives contract, which auditors say, is very difficult to calculate if it's of a complex nature.
The apprehension is that the Act will increase the auditors' workload considerably. Also, they have to take indemnity insurance against third party liabilities, which is going to be highly expensive, spurring the fear that only the larger firms will be able to afford higher insurance costs.
Auditors are also prohibited from proving non-audit services such as consultancy including investment advisory, investment banking and management services. Above all, the overriding fear is that auditing will now become high cost and very conservative, which will dissuade new professionals from joining the profession.
But the worse part is that the new auditors can re-state the accounts of the old auditors, if they are not convinced that the old accounts are authentic. A restating of accounts will bring its own set of problems as the earlier auditor will then be liable to litigations, penalties and long-winding explanations of the accounting standards that were used.
There are other apparent problems. A partner can now do only 20 audits per months, without any distinction between public and private companies. Auditors fear that this reduces the amount of work that they can take and increases their costs.
Auditors have for long have set up management information systems that aims to provide company management with crucial information on business growth. This will see the revenues of audit firms declining. Auditors are also restrained from providing such services to any other group firm, as this will altogether bar them from auditing any of the group firms.
Another bone of contention is about a new whistle blower policy. An auditor should immediately inform the government if he believes there are reasons the officers or employees of a firm have committed a fraud. A mere allegation or suspicion will now have to reported to the government. "As a profession we do not have any guidance as to how we can do this, and what can constitute a fraud," says Harinderjit Singh, partner, Pricewaterhouse Coopers.