The Companies Bill currently under revamp has, among other things, proposed the periodic rotation of auditors and specifies a maximum tenure of five consecutive years. Surprisingly, this provision appears to have been inserted without a recommendation by any of the expert groups working on the bill.
If you look at worldwide trends, it is clear that the emphasis is on protecting the auditor's tenure rather than restricting it. The US, UK, West Germany, Australia, Canada, Spain, Belgium, Singapore, Malaysia or Hong Kong have no requirements for compulsory rotation of auditors. In fact, France stipulates minimum periods for the appointment of auditors in the corporate sector of three to six years and reappointment thereafter. Some countries had provisions for rotating auditors in the past but had to scrap them due to serious adverse consequences. Even in India, the issue has been discussed a few times in the past. In 1972, it was raised and dropped after debate by the Parliamentary Select Committee and it was unsuccessfully raised yet again in 1984.
It is strange that in an era of liberalisation and globalisation, the Companies Bill proposes to introduce a restriction on the rights of shareholders of companies to appoint their own auditors. International investors will be rightly dismayed by such a requirement. One of the main factors considered in the past for the removal of such provisions by the international community is the extreme instability it causes the profession. Established audit firms employ a reasonably large number of chartered accountants and provide them with experience and training both within the country and internationally. Many employees progress to become partners of such firms and are able to assume positions as practising professionals. Other chartered accountant employees of established audit firms branch out to hold important positions in industry, commerce and financial services. The opportunities for such young and able chartered accountants would be jeopardised by the insecurity that compulsory rotation would bring.
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Since the quality of audit depends largely on the size, strength and experience of the audit firm, an important concern associated with rotation is the resultant decline in the quality of audit. This recommendation would lead to unhealthy practices such as sub-contracting audit work. It would also result in the fragmentation of audit firms. There would be no incentive to understand the client's business or for investment in staff training and development. Instead, there would be an unhealthy scramble for audit work.
The main logic in favour of rotation is that it enhances the independence of auditors. On the contrary, rotation would, in fact, enable dishonest managements to change "inconvenient" auditors by eliminating the stigma that is attached today to any attempt to change auditors.
In practice, auditors of public sector undertakings are changed every three years. Experience shows that due to the reluctance of the auditors to invest time and effort in understanding clients business, the quality of audit may have suffered.
In other words, rotation would result in an equality of mediocrity, rather than the emergence of a meritocracy. Firms that have been well established cannot suddenly be equated with those that do not have the critical mass or expertise or resources to ensure high quality professional services.
The "wise men" in high places need to concentrate instead on taking constructive steps to enhance audit quality by encouraging specialisation and upgradation of skills and ensuring that the auditing profession makes a smooth transition to the twenty-first century.
Well- established firms cannot suddenly be equated with those that lack the critical mass or expertise to ensure high quality.