MCA consultation paper on audit independence: Ushering in a new era of reform

K.R.Srivats New Delhi | Updated on February 08, 2020 Published on February 08, 2020

Five threats to independence of auditors sought to be squarely addressed

A complete overhaul of audit profession structure is on the anvil if the latest MCA consultation paper on enhancing Audit independence and accountability is anything to go by.

The 20-page consultation paper has sought comments from government departments and regulatory agencies among others—by February 28– on wide ranging issues affecting audit independence including a proposal to prohibit audit firms from providing non-audit services to their clients; how to address the oligopoly of “Big 4” audit firms (economic concentration of audit) and making NFRA prepare a separate panel of auditors for appointment as auditors of listed entities.

This consultation paper seeks to squarely address five “threats” for auditor independence —self-interest, self-review, advocacy, familiarity and intimidation.

Comments have been sought over making joint audit mandatory for bigger companies; whether number of audits under one audit firm/auditor be reduced and whether the number of partners under one audit firm be reduced or fixed:

An interesting aspect is also on the issue of whether the holding company’s auditor must also review the working papers of auditors of subsidiary and make mandatory comment on the account of subsidiary companies.

Suggestions have also been sought as to whether unlisted company whose parent company is a listed company should also require submitting quarterly returns to SEBI. To reduce the NPAs and defaulters of loan payments, suggestions have been invited on whether audit firms should also give opinions on the “ probability of default” on the lines of credit rating agencies.

Composite audit quality index

The Corporate Affairs Ministry (MCA) consultation paper has proposed the development of a ‘Composite Audit Quality Index’ to improve accountability of auditors and audit firms. Suggestions have been invited on what qualitative and quantitative parameters should be included in such an index, how they should be measured and which are the companies that should be mandated for.

Experts’ take

Ashok Haldia, former Secretary of CA Institute, said the consultation paper seems to be a precursor to radical changes that may follow in auditor- auditee relationships."How to make auditor independent is a question as old as history of corporate laws goes and answers have also been very obvious - make appointment of auditor independent of client and audit fee should commensurate with quality of audit expected and then prohibit auditor from accepting non-audit assignments.

Unfortunately, every time government and regulators have opted for sub-optimal solutions - facade of audit committee, independent directors, rotation of audit partner or optically hiving off non-audit work in the audit firms. If auditors independence is to be ensured, then the choices are limited and call for radical reforms”, he said.

Amarjit Chopra, Past President, Institute of Chartered Accountants of India (ICAI) said that auditor should not be providing any other service to the organisation that he audits or subsidiaries or associates or joint ventures thereof as it hampers his independence.

“You may not put a blanket ban. In Indian context, this restriction on non-audit service should not be imposed on very small firms. It should begin with public interest entities —listed companies or companies that have borrowings beyond a particular limit from banks or financial institutions”, he said.

On addressing economic concentration of Big 4, Chopra said that government departments themselves are the biggest culprits in leading to the concentration of work into the hands of Big 4.

“Every tender they (government departments) float is tailormade to suit the requirements of Big 4. Reducing economic concentration cannot happen in such situation. There is need to promote Indian audit firms particularly at the Government level”, he said.

G Ramaswamy, Past President, ICAI said that the MCA consultation paper should be considered positively as it will help improve corporate governance in companies.

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Published on February 08, 2020
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