Bill for tighter audit framework

The Reserve Bank of India had in 2021 made it mandatory for financial institutions having asset size of Rs 15,000 crore or more to undertake joint audits.

Government is likely to implement phased roll-out for mandatory joint audit of companies, starting with “public interest entities” and large listed companies soon. The proposal, aimed at tightening the audit framework and enhancing the credibility of audit reports, will be a part of the amendments to the Companies Act that are to tabled in Parliament in the upcoming Budget session.

According to sources, the government will likely accept the key recommendations of the Company Law Committee regarding regulation of auditors. This is even as discussions are still taking place on the detailed guidelines for mandatory joint audit – simultaneous audit of a firm by two or more auditors – as well as on the non-audit services (tax strategy, management consulting, valuation, market research, legal advisory, etc) auditors can and cannot provide to the firms they audit, they added.

The Institute of Chartered Accountants of India, the statutory body entrusted with development and regulation of profession of chartered accountancy, comes in to support the proposal of joint audit.

However, most sections of India Inc believe that costs will see a sharp hike due to mandatory joint audits that would require two auditors. Further, large audit firms have understood to have raised concerns that it would impact the audit quality and have also noted that smaller audit companies may not have the resources and expertise to take up such jobs.

Besides, the government is also expected to take on board comments of the CLC’s report as well on the issue of services that auditors can and can not provide. A distinction is expected to be made for large public interest companies that are under the jurisdiction of National Financial Reporting Authority (NFRA), the new independent regulator for auditing profession, and other firms in this regard. Sources said auditors for NFRA-regulated firms may not be permitted to provide non-audit services to the firms they audit and their subsidiaries/associate firms. Smaller, unlisted firms may be allowed to remain under a lenient regime.

However, the government is likely to give guidance on behaviour and conduct of auditors for all firms where, among other things, it may be stipulated that a mandatory cooling off period must be followed before they take up a position in the company that they have audited.

The two issues – joint audit and regulations of non-audit services of auditors – have been at the core of long deliberations with both the audit community as well as India Inc proposing their own changes. The move comes in the backdrop of financial frauds such as the IL&FS crisis in 2018.

However, officials have indicated that both issues can be easily addressed. “A company can choose to split the same fee between two auditors (in case of joint audit). Further, joint audits would also help smaller domestic audit firms develop their expertise,” a person familiar with the development said, adding that these are already being done for public sector banks.

According to the Companies Act, carrying out a joint audit is the prerogative of the company’s members. The Reserve Bank of India had in 2021 made it mandatory for financial institutions having asset size of `15,000 crore or more to undertake joint audits.

Nihal N Jambusaria, former president, ICAI, said, “In my opinion, joint audit would be a good practice to follow and can lead to better quality of audit. It should be implemented with a good standard operating procedures.” Similarly, the issue of which services auditors can and can not undertake has also seen a lot of debate.

The ICAI in previous representations to the government suggested that those services, which do not interfere with the audit function and are permissible under Section 144 of the Companies Act should be allowed to be continued.

According to the section, services such as audit and bookkeeping, design and implementation of any financial information system; acturial, investment advisory and investment banking are some of the services that should not be undertaken directly or indirectly to the holding company or subsidiary company.

The CLC in its report had said that differing classes of companies may be permitted to avail differing non-audit services from their auditors. “Thus, it recommended that Section 144 of CA-13 may be amended to enable the central government to prescribe a differential list of prohibitions on availing non-audit services or total prohibition of the same for such class or classes of companies where public interest is inherent, as may be prescribed,” it had said.

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