Audit failure: Punish the guilty, do not debar firms, suggests company law panel

KR Srivats New Delhi | Updated on November 21, 2019

This will also help corporates minimise the cost of getting new auditors, say experts

Large audit firms may have a cause for cheer with the Company Law Committee (CLC) veering around to the view that debarring an audit firm should be an exception, and not a rule, when tackling audit failures.

The 11-member panel headed by Corporate Affairs Secretary Injeti Srinivas has, in its report submitted to the Finance Minister, taken a view that an audit firm should be debarred only if the firm refuses to cooperate in the proceedings or if its top management is involved in the fraud.

The CLC said debarment may be restricted to those individuals/partners associated with the firm actually involved in the fraud. It suggested that this may be taken up in the next round of company law reforms. Simply put, this clarity could be introduced in the company law at a later date when the next round of legal changes are contemplated.

‘Harsh’ regime

This is in variance with the current regime where the National Financial Reporting Authority (NFRA), the new regulator of auditors in listed and large companies, is empowered to pass an order debarring any auditor — an individual or a firm — from being appointed an auditor, an internal auditor or a valuer for a minimum period of six months and a maximum of 10 years.

Also, there is no legal provision to limit the debarment to the partner(s) actually involved in the wrongdoing.

The CLC’s stance is bound to come as music to the ears of several professional firms, especially those operating as Limited Liability Partnerships with, say, 200-300 audit partners. Not only will such an approach be a departure from the current harsh regime, it will also help corporates in terms of ease-of-doing-business and minimise costs in getting new audit firms on board, say economy watchers.

The main point is that several audit firms have huge talent, which should not go wasted by closing the whole unit for the misdeeds of a few, feel supporters of the CA profession.

“You can’t kill the entire profession for the misconduct of one signing audit partner,” said an audit professional who did not want to be named.

Sudhir Soni, National Director and Partner, Assurance Services, S.R. Batliboi & Co LLP (a network firm of EY in India) told BusinessLine: “The provisions for debarment of firms is harsh and may deter professionals from pursuing careers in the audit profession. The law should allow for alternative remedies such as close monitoring of the firm, and sanction on the partner, and debarment should be pursued only in exceptional circumstances.”

Ashok Haldia, former Secretary, Institute of Chartered Accountants of India, had a slightly different take: “While an audit team has primary responsibility, the firm also has an important role to play in ensuring audit quality. This has been well-captured in applicable standards on auditing. If audit failure is attributed to gross failure at the firm level, the firm ought to be held responsible. The ban on a firm may be warranted depending on facts and circumstances of the case and the gravity of failure.”

Published on November 21, 2019

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