The Centre for Economic Policy Research (CEPR), in a recent report, has said the right of appointment of auditors should remain with the shareholders.

“India’s focus is on establishing a high-quality capital market to attract investments; shareholders and investors must have a free choice to appoint auditors, which is fundamental to ease of doing business in India,” said the report.

The appointment of auditors has been a subject of discussion triggered by the recent alleged audit lapses. The incidents have created doubts in the minds of stakeholders on the independence of auditors.

Individuals/firms that audit companies which fall under the jurisdiction of the National Financial Reporting Authority (NFRA) have to disclose the names of their audit clients to NFRA. The NFRA maintains/will maintain a list of such auditors and audited companies, which is also a form of empanelment.

Banking and insurance regulators monitor the appointment of auditors at the respective institutions, while the Comptroller and Auditor General (CAG) does it for PSUs.

Supply-side restrictions

“One more requirement of empanelment will only build in bureaucracy in the profession, besides taking away the rights of shareholders to appoint the auditor of their choice from the whole market of auditors,” said a senior partner at a leading audit firm, who did not wish to be named. “The shareholders’ right to appoint the auditor that they think is fit and equipped to audit the company should not be curtailed by adding artificial restrictions on the supply side.”

Experts believe that there is already, in a way, empanelment of auditors in India. All auditors and audit firms are registered with the Institute of Chartered Accountants of India (ICAI), which is a form of empanelment. The ICAI certifies the qualification of CAs in India and provides the Certificate of Practice to auditors.

“Audit committees play an important and critical role in the appointment of auditors,” said Pavan Kumar Vijay, founder, Corporate Professionals. “Auditors are governed by independence standards issued by the ICAI, under the Companies Act and other regulations. Steps should be taken to ensure that audit committees are also independent and fully equipped to make the right decisions for auditor appointments. Audit committees should be diligent in reviewing and approving the work done by the auditors.”

Need for expertise

According to the CEPR report, shareholders should be free to choose the auditor that meets their criteria of size, service quality, audit methodology and tools. “The corporations should look to appoint audit firms because of one’s higher service quality and bandwidth. This becomes more relevant in the case of specialised industries (such as financial sector, telecom, power, etc.), where there is low availability of auditors with sufficient expertise and capability and where audits require the extensive use of experts such as IT specialists, actuaries, valuators, etc,” the report said.

It added that global experience shows that in all the major geographies — including BRICS nations, the EU, the UK, the US, China, Japan, Singapore, Australia and BIMSTEC nations — shareholders hold similar rights to appoint the auditors.

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