Should rotation of auditors be allowed?

Debate

Kaushik Dutta
Lovelock & Lewes

Can an association of newspapers pass a resolution that a reader should read Business Standard for one week, then has to switch to the Economic Times in the second week and thereafter he has to read Financial Express in the third week?

 Should a patient be required by the medical association to change his heart specialist every alternate year? Should the bar association prescribe that if a lawyer has argued your case for two years, his time is up and you need to appoint a new lawyer?

 Well, this is what the Institute of Chartered Accountants of India (ICAI) has sought in the resolution passed by its council in the matter of audit.  There is a traditional code of conduct governing human behaviour that a person does not take part in the decision making if he is an interested party. This is a matter of character.  Over the centuries this has woven itself into the laws. The ICAI is an association of chartered accountants. Every practising chartered accountant has a vested interest in the matter of rotation.  Clearly, they cannot take part in the decision-making. That is why the resolution is surprising.  Mind you, rotation is not a political issue which can be decided by a vote or referendum of interested parties. It is a serious matter impacting the economy involving detailed consideration, inter alia, of:  

• whether the scale of auditors and the quality of audit would be seriously impacted by the uncertainty caused by rotation;
• whether fragmented small firms caused by uncertainty will have the resources to invest in training and infrastructure, necessary for audit in the modern world;
• whether the large listed companies, spanning the country can effectively be audited by small fragmented auditors;
• whether it makes sense if by the time the auditor gains insight into the business of the company, he should be rotated out; and
• importantly, whether the shareholders