Policy

Audit firms not enthused with MCA proposals to tighten norms

Surabhi Mumbai | Updated on March 29, 2020 Published on March 29, 2020

Policy should focus on improving the audit quality and upskilling smaller auditing firms, say experts

A proposal by the Ministry of Corporate Affairs to tighten norms for auditors, following the IL&FS scam, has found few takers within the industry. While many question the need for more restrictions, others say policy measures should focussed on improving the audit quality and upskilling smaller domestic auditing firms.

The MCA had floated a discussion paper in February with an aim to overhaul the structure of the audit industry by increasing audit independence and accountability. Though the scrutiny of an auditor’s role came under the spotlight after the Satyam fiasco, recent troubles in the financial sector, including the cases related to DHFL and PMC Bank, have raised sharper questions on the auditing service providers.

The discussion paper has identified five threats to auditor independence including self-interest, self-review, advocacy, familiarity and intimidation. To address these, it has proposed prohibiting audit firms from providing non audit services to audit clients, rotation of audit partners, measures to reduce the economic concentration of the “oligopoly” of the Big 4 audit firms, joint audits for bigger companies, creation and maintenance of panel of auditors for non-government companies by external authorities like NFRA or the CAG.

A number of previous committees like MCA’s Expert Group on Issues related to Audit Firms in 2018 and the Chawla Committee or MCA’s Expert Group on Issues related to Audit Firms in 2017 had also dwelled on some of these issues.

Atul Kumar Gupta, President, Institute of Chartered Accountants of India (ICAI) believes that there has to be a nuanced approach. “Through empowerment of these firms and bringing more regulations on independence, we will be able to create the right balance,” he said.

Others say that proper implementation of existing regulations in the Companies Act would be sufficient.

“It’s not as much about increasing regulations for improving audit quality but more about implementation and compliance with the existing ones, which are already in place and meet the international standards, ” said Yogesh Sharma, Assurance Head and Deputy Managing Partner BDO India.

According to PR Ramesh, former Chairman, Deloitte India, the discussion paper seems to have moved into other areas which do not impact audit quality - such as choice and concentration. “I don’t think these issues are related to quality, although there is a linkage of independence to quality,” he said.

“The paper should address the entire financial reporting ecosystem from standards of preparation, internal audits, audit committees, role of rating agencies, etc. It can’t just be the role of auditors that is looked into,” he said.

The issue of separation of audit and non-audit functions seems to have raised quite a few eyebrows as there is already a list in the Companies Act and Indian laws are seen to be more restrictive than those globally.

To tackle what is deemed to be a “perception issue”, some audit companies including PW India, Grant Thornton and the Indian affiliate of Deloitte Haskins have already announced that they will no longer offer non-audit services such as consulting, due diligence to public interest entities which are its audit clients.

Sudhir Soni, National Director and Partner, Assurance Services, SR Batliboi and Co LLP pointed out that there are already certain restrictions on services placed by the Companies Act and under ICAI Code of Ethics for auditor independence. “The large firms also follow the IESBA global independence code across the network of their firms. We understand the need for restrictions but don’t think there should be a complete ban on non-audit services because in some situations like due diligence for acquisitions and for tax compliance, it is often useful for the company to engage their auditors” he said.

Most auditing firms as well as India Inc companies have also questioned the data used by the MCA for a proposal to restrict the number of audit firms a group --Big 4 can have in the country. The discussion paper has cited data from Prime Database to say that 70 per cent of the about 1,800 companies that trade on the National Stock Exchange are audited by firms affiliated to Big 4.

“Based on published information, only 26 per cent of the top 1,800 listed companies are audited by the Big 4 firms and the remaining 74 per cent are audited by other firms,” the Confederation of Indian Industries said in its response, adding that the notion of economic concentration is unfounded.

“The share of the Big 4 in auditing is much lower than what has been indicated in the discussion paper, as these firms do not audit public sector banks and other public sector entities,” said Ramesh

He warned that some of the proposals would lead to the baby being thrown out with the bath water. “Any change has to be gradual and carefully calibrated with outcomes and end state clearly determined. Large firms in the country are leading employers and have invested in infrastructure, technology and best practices,” he noted , adding that it seems to be not in line with other policy directions of the Government where size is being encouraged for example mergers of banks to create more large banks rather than making the banks smaller by splitting up.

Similarly, a proposal to reduce the number of audits by a firm has also found few takers though many believe that joint audits –like what IRDAI has mandated for insurance companies may be a good option. “Through empowerment of these (domestic audit) firms and bringing more regulations on independence, we will be able to create the right balance,” Gupta told BusinessLine, noting that the ICAI in its response to the government has re-iterated its proposal of 2011 for a joint audit above a certain threshold.

“We have requested that it can be started at the earliest, which will imbibe the maker-checker concept in assurance services,” he said. However, Sharma of BDO India said, “I am not sure whether joint audit will result in an improvement of audit quality and it’s been a matter of debate for long, but it does bring an opportunity for small and medium practitioners to upgrade their skills and prove that they can deliver on large engagements.”

According to CII, there is wide fragmentation in the Indian economy with only 2,270 audit firms having more than five partners and only around 50 audit firms with more than 20 partners. For non-assurance services, ICAI has given a positive list. “We have also given an international comparison of how many services are banned globally. Presently, more non-assurance services are banned in India,” he pointed out.

ICAI is also opening a Centre for Audit Quality in May 2020. “We are spending huge resources to develop the inbuilt quality of audit firms which are largely proprietary in status. We are working to develop strong and large firms, by easing out the network and advertisement guidelines,” Gupta said.

Jamil Khatri, Partner and Head, Audit at BSR & Co LLP also agreed on the need to upskill local firms. “If the government sets up a Centre for excellence for audit quality, we and other large firms can be required to share our experience and resources with other firms, such that they can also benefit from the investments we make,” he said.

He also said the firm has highlighted the role of the audit committee of the board in developed markets like the US and UK, where they are the ones who lead the interaction with the auditor. We have highlighted that the audit committee should be the client of the auditor and not the management. They should directly lead discussions around the appointment, remuneration and performance of auditors.

But a common view amongst all auditors big and small has been that audit can only do so much. “RBI appoints auditors for public sector banks. But have cases of diversions been lesser in PSBs than private banks?,” counters a top auditor in Mumbai.

Others point out that if a promoter or a company genuinely wants the business to fail, then no one can stand in their way. “There is no answer for greed,” said an auditor who did not want to be named, adding that it has to be differentiated from genuine business failure.

Ramesh puts it more succinctly. “Audit is like a thermometer with a limited objective. It can tell the fever but it cannot cure the disease.”

With responses by stakeholders already submitted, the prescription will now have to be written by the government.

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Published on March 29, 2020
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