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Large auditors raise fresh objections to joint inspection proposal

October 24, 2022

Subsequently, the Company Law Committee, under then corporate affairs secretary Rajesh Verma, had presented a plethora of suggestions, including the mandatory joint audit for mainly large companies.

Large audit firms have raised a fresh set of objections to a proposal of the Company Law Committee of the ministry of corporate affairs (MCA), for a mandatory joint audit of a certain class of companies, to bolster the country’s audit framework and prevent frauds, according to sources. Such a move will only harm the audit quality instead of improving it, they have argued.

Commenting on the panel’s report that was submitted with finance and corporate affairs minister Nirmala Sitharaman in March, the big auditors have now stated that large and complex multinational corporations (MNC) require auditors with wide geographical coverage and expertise. A substantial gap between the resources and capabilities of firms involved in a joint audit can, therefore, potentially compromise on the audit quality, even when such an exercise raises the costs for the auditee. The comments are part of the latest stakeholder views sought by the MCA.

In a joint audit, two or more firms conduct the audit of a company and produce a single report. At present, the joint audit is largely voluntary in nature, except for banks and public-sector units. Last year, the Reserve Bank of India made it mandatory for financial institutions having an asset size of Rs 15,000 crore or more to undertake joint audits.

The big auditors’ opposition to joint audits pits them against the Institute of Chartered Accountants of India (ICAI), which has endorsed the idea. Even industry bodies like the CII have argued against the joint audit proposal, saying it doesn’t guarantee more transparency. The audit market is currently dominated by the big four –EY, PwC, Deloitte and KPMG.

The MCA is planning to introduce a Bill to amend the Companies Act in either the winter or the Budget session of Parliament, sources told FE. Tightening the audit framework is going to be one of the key amendments. According to the extant Companies Act, carrying out a joint audit is the prerogative of the company’s members.

Some of the big auditors have argued that MNCs often require auditors that are present across countries, and having a network audit firm across the group leads to efficient communication among management, auditors and all the executives in charge of corporate governance. Mandatory joint audits will exacerbate the situation for them, as the number of audit firms with such vast reach, expertise and resources is very limited, they added.

Moreover, mandatory joint audits, on top of the elevated reporting requirements under the Companies Act, will only bite into the senior management’s time, the auditors have said.

A former ICAI president, however, said: “The main issue is that big auditors fear they will lose out, as audit fees will be shared among the auditors involved. Industry chambers are against it because joint audit will raise the costs for their member-companies.” “But any such system will not just ensure greater transparency but also generate business opportunities for a larger pool of auditors. So, the ICAI is supporting it,” he added.

An email sent to the ICAI on October 19 for the views of its president, Debashis Mitra, on the joint audit proposal, didn’t elicit any response.

While the call for joint audit is not new in India, it grew shriller after the IL&FS crisis exposed the abysmal audit quality and the alleged involvement of auditors in this scandal. Subsequently, the Company Law Committee, under then corporate affairs secretary Rajesh Verma, had presented a plethora of suggestions, including the mandatory joint audit for mainly large companies.

The panel had suggested that the government will determine the class of companies that will have to conduct joint audits. It will also fix the responsibility of each of the auditors involved.

Citing its interaction with some of the companies with joint auditors, the CII has told the government that they do not see any benefit from joint audit. “…instead, there is a concern about risk due to none of the joint auditors seeing the whole audit,” it has said.

It has also pointed out that an expert group under former finance secretary Ashok Chawla “found that joint audits impose unnecessary costs on companies, exacerbate rather than mitigate audit risks, and do not encourage the type of resource- and expertise-sharing that benefit smaller firms”.

According to the International Federation of Accountants, joint audits are currently required in 55 countries, with France being the only major jurisdiction that follows it; the European country requires such audits for all companies that prepare consolidated financial statements. But some others like Canada and Denmark discontinued the joint audit requirement in 1991 and 2005, respectively, on the grounds that it’s expensive and ineffective.

[The Financial Express]

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