FDI policy tweak opens up ‘joint audits’ in some Indian firms

The Centre has opened a window of opportunity for domestic audit firms, which can now look to be part of “joint audits” of Indian companies receiving foreign investments.

It has now amended the Foreign Direct Investment (FDI) policy to stipulate “joint audits” for the Indian investee company in cases where the foreign investors wishes to specify a “particular auditor/audit firm having international network” for the Indian investee company.

“The audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network,” according to the amended FDI policy.

The CA fraternity had mixed reactions on the development, although most welcomed the move as one likely to favour domestic audit firms.

G Ramaswamy, former President of CA Institute, said that the FDI policy change was a welcome step that would help both domestic firms and foreign auditors.

“This is a welcome move that will aid and protect Indian firms. In fact, both sides will benefit”, he said.

This presents an opportunity for domestic audit firms to interact with bigger global firms to share their knowledge and compete on a global scale, he said.

It will also be an opportunity for foreign auditor to better understand Indian environment and business processes.

However, Amarjit Chopra, Chairman of National Advisory Committee on Accounting Standards (NACAS), felt that it was not necessary that Indian audit firms will definitely gain from this move.

“It would have been desirable that the FDI policy change mentioned one network firm and one non-network firm shall do the Joint audit rather than stating that one of the auditors should not be part of the same network.

“So technically, still two international network can do the joint audit of an Indian investee company without giving an opportunity for the Indian firms,” Chopra said.

Ashok Haldia, former Secretary of the CA Institute, welcomed the stipulation in the FDI policy.

“The stipulation of joint audit is only when foreign investor indicate a specific audit firm/international net work — which at times they do so to ensure consistency in application of audit processes and standards and seamless audit. However, such a practice may be vulnerable to independence and objectivity of audit as the law and Auditing standards in India may require ‘local’ perspective,” he said.

Sai Venkateshwaran, Partner and Head, Accounting Advisory Services at KPMG in India, said: “While the Companies Act has enabling provisions to allow appointment of joint auditors, practice shows that not many companies have opted for this. Globally studies have shown that joint audit increase costs and inefficiencies for both companies and their auditors.

“Therefore, this may become a little onerous for companies seeking foreign investment, if the investor were to have a say in the appointment of auditors.”

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