Draft company law rules put auditors in a spot

The auditing fraternity is facing regulatory heat with the draft rules on the new company law looking to implement mandatory auditor rotation on a retrospective basis.

For the first time ever, India is introducing mandatory auditor rotation — both at an individual auditor level and at the audit firm level.

The implementation of this norm is expected to enhance auditor independence and audit quality.

The auditing fraternity had, in recent years, come under a cloud after a spate of accounting scandals, such as Satyam Computer and Reebok India. This prompted the Government to mandate auditor rotation.

The new company law, which came into force on August 30, stipulates that an individual cannot be appointed as an auditor for more than one term of five consecutive years. Shareholder ratification is also a must every year.

Also, the same individual can be re-appointed as auditor of the same company only after a cooling period of five years from the end of his earlier five-year term.

The draft rules also stipulate that an audit firm cannot be appointed as an auditor for more than two terms of five consecutive years.

Cooling period

There also has to be a five-year cooling period before an audit firm is reappointed after completion of two terms of five consecutive years.

India Inc will get three years to implement the new regime.

In deciding on the timeline as to when mandatory auditor rotation should kick-in, the draft rules, released on Monday, proposed that the period of holding office prior to the commencement of the new law will be counted.

“It was clearly surprising to see retrospective application of auditor rotation norms when the law (new company law) talks of two terms of five consecutive years (prospectively),” N. Venkatram, Managing Partner-Audit, Deloitte, Haskins & Sells, told Business Line .

Prior to the new law, an auditor/audit firm could be appointed by shareholders for a maximum period of one year.

“In the earlier regime, an auditor was never appointed for any term of five consecutive years. His appointment was for only one year. A term of one year is not the same as a term of five consecutive years. So, counting the past period could be questioned,” Venkatram said.

Interestingly, the draft rules are silent on the class of companies (besides listed entities) to which auditor rotation will be mandatory. This is under consideration of the Government, say the draft rules.

Vishesh Chandiok, National Managing Partner, Grant Thornton, said there was need to restrict the auditor rotation exercise to perhaps only the Sensex or Nifty companies — being the largest public interest entities — to start with.

“After learning from this experience and if it serves the original objective, then auditor rotation should be extended to a larger subset of companies in a phased manner,” Chandiok said, while welcoming the concept.

If the Corporate Affairs Ministry’s earlier plan of pegging the threshold at Rs 100-crore turnover were to be implemented, then over 10,000 companies will need to rotate auditors in the coming three years, he said, adding that this could be difficult to monitor.

Meanwhile, the draft rules stipulate that an incoming auditor will not be eligible, if such auditor is associated with the outgoing auditor under the same network of firms or is operating under the same trademark or brand.

> srivats.kr@thehindu.co.in

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