NEW DELHI : The government has decided to move with caution while changing the rules governing audit. The decision comes despite the slew of defaults by non-bank lender Infrastructure Leasing and Financial Services Ltd group, which has more than 90,000 crore in debt, igniting a liquidity crisis in the shadow banking sector last year. The crisis had prompted policymakers to take a long hard look at how to better regulate key gatekeepers in the corporate world—statutory auditors.

The ministry of corporate affairs will, therefore, examine structural problems in corporate governance and issues such as manpower requirement and the cost of giving quality audit services, concentration of auditors in the industry, and the impact of possible rule changes on big and small auditors before imposing fresh restrictions on the audit practice. The shift to a more calibrated approach in enhancing audit quality and ensuring the independence of the auditor comes in the wake of a slowdown in economic growth, during which the government does not want to rattle the industry with rigorous rule changes overnight.

Improving audit quality is part of a larger plan to improve corporate governance, said an official privy to discussions in the government on condition of anonymity. “We need to examine what needs to be prohibited and what revenue needs to be capped. It cannot be done in a hurry. Audit firms may have their own perspective, which we may or may not agree with. When we make a major directional change in audit regulation, we cannot go back and forth. We have to go gradually," said the official.

Governance lapses in defaulting firms have also highlighted a gap in expectations about the role of statutory auditors. While statutory auditors are expected to certify the financial statements of the audited company to be a true and fair account of its affairs, forensic auditors detect fraud. “If a statutory auditor has to look into the affairs of a company from the eyes of a forensic audit, the audit standards have to be reviewed," said Sudhir Soni, national assurance leader, SR Batliboi.

One of the ideas the ministry considered earlier to improve the independence of statutory auditors was to curtail their non-audit practices. Large networks of firms offering audit and non-audit services to clients through different entities in the network may not be affected by this. However, small audit firms which also offer tax-related services to the same client may get hit as it could affect their viability, said an audit industry executive on condition of anonymity.

“Everybody agrees about the need for improving corporate governance, the issue is about what medicine needs to be given. Governance issues need to be resolved without affecting viability," said the official mentioned earlier.

The other issue before the ministry is the concentration of audit firms or monopoly in the audit market and the availability of auditors matching the size and needs of the business to be audited. Improving the choices available for businesses would entail incentivizing small, local audit firms to grow big, said an audit industry veteran, asking not to be named.

Industry experts also said concentration of audit firms is not a problem in India. “Only 60% of the top 500 listed firms are audited by the big four accounting firms in India. If you take all the listed entities, the share of the big four is significantly lower," said the industry executive mentioned earlier.

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