Companies Bill prescribes stringent rule for auditors

The long awaited Companies Bill was finally passed by the Lok Sabha yesterday. The new set of rules are expected to improve the quality of governance as it prescribes for stringent rule for auditors and strengthens the hands of the Serious Fraud Investigation Office (SFIO).

The amended legislation, with 470 clauses, limits the number of companies an auditor can serve to 20. It has also brought in more clarity on criminal liability of auditors. Besides, the approved amendments also include annual ratification of appointment of auditors for five years. But industry experts are of the view that though the amendment is welcome, changes should be rolled out in phases or applied to a smaller set of companies first.

"I am very glad to see the long awaited bill go through and all steps that even only have a perception of increasing corporate governance should be hailed. However, provisions like those on rotation of directors and auditors, whilst again welcome, should first be applied to a small subset of the 8000 listed companies, and based on experience extended further," said Vishesh C Chandiok, National Managing Partner, Grant Thornton India LLP.

A recent survey conducted by Grant Thornton said that drastic changes in the role of auditor needs to be applied in phases.

According to the survey, a clear majority of businesses across India (90%) believe the need for a more diverse audit market, and 79% believe it would help market confidence if every large public company was audited by two firms rather than one.

Further, 66% support mandatory rotation of audit firms (with 6% opposing mandatory rotation) to address the risks of 'over familiarity' between the auditor and the audited company.

Mandatory rotation may enhance auditor independence by reducing the average audit tenure. It may however also has the unintended consequence of actually increasing the dominance of the largest 5-10 firms in lieu of a number of well-established medium sized firms, said the survey.

The survey was conducted by a leading global independent research agency (Experian) in August and September 2012 as part of the Grant Thornton International Business Report, a quarterly global business survey of 3,000 businesses of which 100 were from India.

The other highlight of the Bill is the extent of subordinated legislation. "There are over 300 places, where the rules need to be prescribed. Such clauses in the Bill would only be effective when the related rules are framed and notified. This should be done after careful evaluation as several clauses are intended to be applied to all the 800,000+ companies or the 8,000+ listed companies," said Chandoik.

The roles and responsibilities of directors, independent directors and auditors have also been dealt with in great detail; however, it would be good to ensure when the rules are framed to bring in adequate checks and balances, to serve as anti-abuse provisions, said the note from the company.