Anyone losing out substantially in the bourses might point a finger at the auditor.

The Companies Bill, 2011 breaks new ground in the matter of appointment of auditor and his duties and liabilities. These fresh initiatives can be counted upon to receive their share of bouquets and brickbats in equal measure because, like a curate's egg, while some of them are welcome, some are indeed harsh, if not ill-thought out.

Auditors of companies, in general, will enjoy a five-year tenure, with companies enjoying the right to reappoint the same auditor for another period of five years and so on. But not so in respect of listed companies.

In listed companies, an individual-auditor cannot be reappointed after five years before he cools his heels for five years and a firm of auditor can be reappointed for a fresh term of five years thus making its aggregate stint in a company at ten years.

A firm too has to cool its heels for five years before it can be appointed again after having served for ten years in aggregate.

During the cooling-off period, a firm will not qualify for appointment even if one of its partners happened to be a partner in the firm that was the auditor for the last ten years. One does not know why there is a discrimination against individual auditors and firm of auditors in the matter of aggregate tenure but that can be allowed to pass for the nonce.

The Bill does not set much store by the concept of rotation of audit partners that forms the bedrock of the US Sarbanes Act.

Instead, the Bill mandates rotation of the firm lock, stock and barrel while leaving it to the general body to call upon the auditing firm to rotate audit partners.

The major criticism in the matter of appointment of auditors has been that promoters handpick the auditors unlike in case of public sector companies where the auditor is appointed by the neutral body C&AG.

Heeding this criticism, the Bill seeks to give powers to the Central government to spell out the manner of selection of auditors.

It would have been so much better had the mandate been appointment by a neutral body such as SEBI so that the auditor assuming charge for the next five/ten years remains a surprise factor, not amenable to pressure of any sorts.

The option given to the general body to go for more than one auditor makes sense so long as the multiple auditors do not act in cahoots but act independently and give independent reports, stark variations in which would bring out the shortcomings and strengths in the approach of each.

Damocles' sword

Auditors in the new dispensation are going to squirm uncomfortably all through. For, the company tribunal can overthrow the auditor if it is satisfied that he has been complicit in any fraud with regard to the company he is auditing on the basis of a suo moto enquiry or enquiry launched at the behest of anyone directly or remotely concerned with the company.

The auditor thus has to watch out and be on his toes. He may have to defend his actions or lack of them every now and then if someone chooses to heckle him. No less onerous is the whistleblower role expected of him. In other words, not only should he not commit fraud or be complicit in any fraud but furthermore must blow the whistle at the first hint of a conspiracy by the management of the company to defraud the company.

For violation of these and other mandates, he can be penalised with an amount ranging from Rs 25,000 to Rs 5 lakh.

A higher penalty awaits him if he was privy to deception or fraud in which case the fine can range from Rs 1 lakh to Rs 25 lakh, besides being incarcerated for a maximum of one year.

In addition, the remuneration he has thus far received from the company in his capacity as auditor would be on the line. He can also be hauled over the coals by anyone who set store by his audit report while making investment decisions. These penalties in case of firms would be borne jointly and severally.

Opening the floodgates

By far the most dreaded provision in days to come would be the one calling upon him to pay for damages to the company or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

Auditors may well have to, in days to come, devote considerable time in legal forums defending their actions when suits for damages are filed genuinely or as a result of disgruntlement.

The House of Lord's verdict in Caparo Industries case long ago to the effect that an auditor is responsible only to those who have subscribed to the shares of the company might have had the effect of cocooning the auditors but the Bill would have the effect of making the auditor a favourite whipping boy.

Anyone losing out substantially in the bourses might point a finger at the auditor. If independent directors have started making a beeline for liability insurance policies in the wake of onerous responsibilities thrust on them by the Bill, auditors too can be counted upon to do so for similar reasons.

The Bill has indeed made the lot of independent directors and auditors more onerous.

Nothing wrong in that except that auditors should not be made the punching bag for all and sundry. Exemplary costs should be awarded if the charge of negligence against an auditor turns out to be unfounded.

(The author is a Delhi-based chartered accountant.)

(This article was published on December 27, 2011)
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