Joint-audit proposal: A spanner in the account books?
4 min read 05 Jan 2023, 10:31 PM ISTThere is little evidence to show that joint audits enhance the audit quality, which is why many countries have rejected them. Their challenges and downsides are found to outweigh benefits.
PremiumTransparency and accountability. These parameters are driving government policies worldwide, as today’s investors and other stakeholders expect efficient, time-saving and simplified processes for everything, including audits. Against this backdrop, the government’s most recent proposal of joint audits has become a subject of heated debate, as it’s not even closer to the aforementioned parameters and is in danger of creating more pressure on an already stressed existing audit framework.
The proposal’s nuts and bolts: Instead of the traditional process of involving only one firm to undertake an audit for a company, a joint audit involves more than one auditor. Its intent is better scrutiny, compliance, and, therefore, better business performance. In simple terms, it means two sets of people vouch for the authenticity of information in two separate parts of a financial statement.
The Companies Act of 2013 does not make joint audits a necessity for private companies. A quick look back reveals that it was public sector companies and lenders that transitioned to joint audits, the latter after the Reserve Bank of India (RBI) in 2021 made it mandatory for financial entities with balance sheets larger than ₹15,000 crore.
Ground reality: Undoubtedly, the government’s intent is fine, but the facts and ground reality paint a different picture. In countries where joint audits have been actioned, there is neither much impact nor a perceptible difference reported in corporate governance.
While some financial experts argue that a joint audit is aimed at increasing competitiveness and quality, that they usher in more transparency and can expand a company’s capabilities, the fact remains that joint audits have been very rare and largely rejected by the EU and other jurisdictions like the US, UK, Indonesia, EU, China, Brazil, Russia, South Korea and Turkey.
It is also expensive. According to estimates from France, a joint-audit approach leads to 20% additional cost, compared to a single- auditor approach. It involves ancillary costs, such as on an additional workforce at the client’s end and on coordination.
A 2019 report titled Shared & Joint Audits: Are two Auditors Better than One? by the Institute of Chartered Accountants in England and Wales states, “Government and audit regulators would need to consider support for challenger firms and listed companies if joint audit reforms were introduced. They would also need to establish a process for monitoring shared or joint audits to determine whether competition and choice did, in fact, increase over time and whether there was a positive effect on audit quality."
Challenges and downsides:
• Joint audits require both auditors to agree on the group audit opinion, and audit reports can be very voluminous, running into many pages covering all observations and issues. This would require a high level of cooperation between the two auditing firms.
• In some cases, there is always the danger of one audit firm being more dominant than the other, leaving the latter with less bite. This could skew the power balance and lead to disagreements.
• As a part of quality control, each audit firm reviews the work of the other in a joint audit scenario. This evaluation and review are done on the basis of the parameters of every individual firm. When there is no meeting point, it’s an understood fact that the results can differ—thereby leading to a waste of time, effort and finances.
• Joint audits are an additional cost to the companies and their balance sheets.
• If a joint audit must be actioned, then, as is typical in conventional scenarios, the auditing firms will need to rely on internal auditors for standard protocols and operating procedures. But this is a double-edged sword, given that it is well understood that internal auditors—who are under internal control—are the weaker wickets in the line-up, and giving them or their process an okay can be risky, in case there are some serious issues which may have gone unnoticed by the auditing firms as they assumed there would be no glitch with standard procedures. To completely circumvent this possibility, a loophole-free framework must be created in the joint-audit proposal as it stands today. Otherwise, this idea by itself is impractical.
The other big struggle is that two different firms handling particular and separate portions of an audit may not really serve well over time. Instead of account conciliation, industry experts feel that it could create gaping holes and therefore more headaches for companies, because it is possible for critical and crucial elements that require auditing and a professional review to slip through such a setting. This might compromise the audit quality and complicate corporate problems, rather than create the seamless process envisioned by the joint-audit proposal.
There is also a big question mark on the ease of business if joint-audit proposal goes through. The real solution to having a more efficient, time-saving and professional system is to ensure that internal financial controls are strengthened and sharpened. Perhaps this needs to be taken into account by the government; data quality efforts could then be aligned with it.
To conclude, there is a critical and urgent need for the government to review the joint-audit proposal. Under current circumstances, it seems to be defeating the very purpose it was meant to serve.
These are the author’s personal views.
Arun Malhotra is founder and CIO of CapGrow Capital Advisors
