The government had set up a committee last year to examine issues regarding audit firms, including restrictive terms for entry of domestic audit firms, and submit a report
New Delhi: An expert audit committee formed by the government has rejected a plea from smaller Indian audit firms to have a mandatory joint audit. The committee is expected to submit its recommendations by Friday, said a person familiar with the development on the condition of anonymity.
The government had set up a three-member committee in September last year to examine issues regarding audit firms, including restrictive terms for entry of domestic audit firms, and submit a report.
This was based on representations from domestic audit firms which complained of the adverse impact on their businesses due to the structuring of certain firms, leading to alleged evasion of various regulations and imposition of restrictive conditions for the appointment of auditors.
The committee, tasked with examining the possibility of introducing joint audit for auditing companies, did not find it a viable alternative for promoting domestic firms. Mandatory joint audit was unlikely to address issues of shareholder agreements containing clauses to appoint a multinational firm as auditor.
“Even if joint audit is mandated, it cannot be described that one small firm and one big firm will handle the audit," the person quoted above said. Internationally, countries which earlier had mandated joint audit eventually gave it up due to extra costs and additional burden on the corporate sector, the person said.
The expert group was also in favour of restricting audit rotation to listed companies, according to the person quoted above.
“Rotation is good thing but instead of applying to all companies it could be restricted to listed companies," the person said.
The committee has also looked at whether the process of rotation will necessarily mean moving from Indian firms to foreign firms, the person added.
The report also focused on the need for domestic audit firms to focus on capacity building and upgrade themselves in terms of size, skill and capacity to adequately compete with transnational audit firms.
The expert group, set up by the ministry of corporate affairs, was required to look into six main questions related to restrictive shareholder agreements, possible negative impact on the market owing to audit rotation and restrictive terms imposed by foreign investors for appointing auditors.
The group was required to analyse practices in other emerging market economies regarding domestic audit firms and joint audit.
The expert group was formed by the government to address concerns raised by audit firms other than the so-called Big Four global accounting firms—KPMG, Pricewaterhouse Coopers, Ernst & Young (EY) and Deloitte.
The committee comprised Ashok Chawla, a former finance secretary and chairman of the Competition Commission of India (CCI), Jubilant Bhartia group founder Hari S. Bhartia and Reserve Bank of India (RBI) deputy governor N.S. Vishwanathan.
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