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ICAI refers auditor rotation issue to internal panel

K.R. Srivats

New Delhi , July 22

AUDIT firms and their partners can now breathe easy on the controversial issue of auditor rotation.

The Institute of Chartered Accountants of India (ICAI) is taking a re-think on the issue.

Superseding the institute's stance taken on this matter in July 2003, the 18th Central Council of the ICAI has referred the entire issue of rotation of auditors to an internal committee — the Committee on Ethical Standards and Unjustified Removal of Auditors (CESURA).

"We have now passed a resolution and referred the entire issue (rotation of auditors) to CESURA. I expect the committee to submit its report within the next three months. The future course of action will now depend on the recommendations of this report," the President of ICAI, Mr Sunil Goyal, told Business Line here.

The committee is expected to deliberate on the pros and cons of introducing a system of audit firm rotation.

"Last year, the council passed a resolution on audit firm rotation and decided to go in for a referendum. But now we have again passed a resolution and referred the entire matter to CESURA. Hypothetically, if the committee feels that audit partner rotation would be more suitable than the audit firm rotation, then the council will consider such a recommendation," Mr Goyal said.

The 17th Central Council of ICAI had in July 2003 passed a resolution giving an in-principle approval for rotation of audit firms.

It also decided to conduct a referendum among the members of the institute on the matter of rotation of audit firms. Along with the referendum, the ICAI was also to seek the opinion of its members on the matter of making the joint auditor system mandatory in listed companies.

A joint auditor system is where every listed entity would have two independent audit firms appointed as statutory auditors.

The two firms usually act as a check on each other and take turns in auditing the different functional areas of a company.

At the heart of the debate on rotation of auditors is the need to ensure "independence" and "audit quality". There have been voices both for and against the issue.

The argument for rotation of audit firms is that if a firm serves a client for decades, then it can lose its independence.

This would be more so if the audit firm were to provide non-audit services to the same client.

On the other hand, there is also a school of thought that believes that the mandatory rotation of audit firms will have a negative impact on audit quality.

It has been contended that audit quality depends on a thorough understanding of business and the management and frequent changes would adversely impact it.

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