Joint Audit as a Tool to Enhance Audit Quality

Joint Audit

A joint audit is an audit of the financial statements of an entity by two or more auditors appointed with the objective of issuing the audit report. In other words, a joint audit involves two or more audit firms working together to issue an audit opinion on the financial statements of an organization. Joint audit as a concept is not limited to statutory audits but can be effectively used in internal audits as well although not very popular.

Position in India

In India, joint audits have been in vogue, particularly in the banking sector. The Reserve Bank of India (RBI), regulator and supervisor of the financial system in India vide its guidelines dated April 27, 2021 prescribed that for Entities with asset size of ₹15,000 crore and above as at the end of the previous year, the statutory audit should be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships (LLPs)]. These guidelines are applicable to the following entities:

a. Commercial Banks (excluding Regional Rural Banks)

b. Urban Co-operative Banks

c. Non-Banking Financial Companies (including Housing Finance Companies)

The Entities should decide on the number of statutory auditors based on a Board/Local Management Committee (LMC) Approved Policy, inter alia, taking into account the relevant factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, availability of other independent audit inputs, identified risks in financial reporting, etc.

Considering the above factors and the requirements of the Entity, the actual number of statutory auditors to be appointed shall be decided by the respective Boards/LMC, subject to the following limits:

It is observed from the recently issued financial statements of the State Bank of India (the Largest Indian Bank and among Fortune 500) for the financial year 2023-24 that there are twelve audit firms as joint auditors who have expressed their opinion on the financial statements of the Bank.

The Insurance Regulatory and Development Authority of India (IRDAI) created by an Act of Parliament to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. IRDAI vide its master circular dated May 22, 2024 prescribed that each insurer except new insurers during their first year of operations, shall have a minimum of two auditors as joint auditors. This Master Circular applies to all insurers except foreign company engaged in re-insurance business through a branch established in India. A joint auditor of an insurer shall not include other associate/ affiliate firms which are under the same network or whose name or trademark or brand is used by the firm or any of the partners of the other joint auditor.

Apart from the above organizations, Public Sector Undertakings in which the Central or State Government has more than fifty percent shareholding frequently appoint joint auditors. The auditors in case of PSUs are appointed by the Comptroller and Auditor General (CAG) of India. The examples of Companies where joint auditors are appointed include but are not limited to Oil and Natural Gas Corporation Limited, National Thermal Power Corporation Ltd, Power Finance Corporation Ltd, etc.

Standard on Auditing (SA) 299: Joint Audit of Financial Statements

The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, viz. The Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the regulation and development of the profession of Chartered Accountants in the country. The Institute functions under the administrative control of the Ministry of Corporate Affairs, Government of India.

Section 143 of the Companies Act, 2013 inter alia proscribed that every auditor shall comply with the auditing standards. Further, the Central Government may prescribe the standards of auditing, or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. To date, the ICAI has issued 46 Engagement and Quality Control Standards which cover the following:

a. Standards on Quality Control

b. Audits and Reviews of Historical Financial Information

c. Assurance Engagements Other Than Audits or Reviews of Historical Financial Information

d. Related Services

Out of the standards proscribed for audits and reviews of historical financial information, the standard on auditing (SA) 299 specifically covers the joint audit of financial statements. The objectives of this Standard are:

(a) To lay down broad principles for the joint auditors in conducting the joint audit.

(b) To provide a uniform approach to the process of joint audit.

(c) To identify the distinct areas of work and coverage thereof by each joint auditor.

(d) To identify individual responsibility and joint responsibility of the joint auditors in relation to audit.

As per SA 299, with respect to audit work divided among the joint auditors, each joint auditor shall be responsible only for the work allocated to such joint auditor including proper execution of the audit procedures.

Joint audits worldwide

Based on data obtained by IFAC and the Institute of Chartered Accountants of England and Wales (ICAEW) in a recent survey of Professional Accountancy Organizations from more than 70 countries, in addition to academic research, IFAC estimates there are as many as 55 jurisdictions where joint audits occur.

• The majority (70%), either permit joint audits (in 22 jurisdictions, an audited company voluntarily elects a joint audit engagement) or require its use under OHADA requirements (17 jurisdictions). OHADA is a system of corporate law adopted by 17 African nations in 1993. Most participants are francophone countries and are understood to require joint audit—as is the case in France.
• France is the largest economy to require joint audits for all listed companies (since 1984) that prepare consolidated financial statements.
• Denmark required joint audits for all listed companies from 1930 to 2005.
• Countries that require joint audits for entities in specific industries or sectors include Bulgaria, Dominican Republic, Egypt, Liberia, Saudi Arabia and South Africa.

Denmark and France are unique jurisdictions—in terms of the duration of use, breadth of application (broad use, not targeted on specific industries or companies), and development of their economies. France continues to use joint audits today (after over 50 years)—focusing on the benefits of a sustainable and less concentrated French audit market—which balances any questions regarding increased cost or debates about audit quality. Denmark mandated joint audits for 75 years but removed the requirement effective 2005 (considering both audit cost and quality), with the majority of Danish companies quickly adopting single audits.

Are Joint Audits really effective?

On the face of it, the involvement of two independent audit firms may have the following benefits:

1. Improved Audit Quality: By involving two or more audit firms, joint audits leverage the diverse expertise and perspectives of different auditors. This collaborative approach can lead to a more thorough and meticulous examination of financial statements, as different auditors might identify different issues or areas of concern.

2. Increased Transparency and Accountability: The presence of multiple auditors enhances the credibility of the audit process. Each firm’s work is reviewed by the other, reducing the risk of errors or oversight. This added layer of scrutiny promotes greater accuracy and reliability in financial reporting.

3. Enhanced Independence: Joint audits can mitigate the risk of conflicts of interest and reduce the influence of management on the audit process. With multiple firms involved, there is less likelihood of collusion or undue influence, which enhances the overall integrity and independence of the audit.

4. Risk Mitigation: The collaborative nature of joint audits can help in identifying and addressing potential risks more effectively. Different auditors might bring unique insights and methodologies to the audit process, leading to a more comprehensive risk assessment.

5. Balanced Workload: Sharing the audit work among multiple firms can lead to more efficient and effective audits. It helps in distributing the workload, reducing the burden on a single firm, and ensuring that complex audits are completed within the stipulated timeframes.

6. Market Competition and Diversity: Joint audits can prevent the concentration of audit work among a few large firms, promoting competition and giving smaller or mid-sized firms opportunities to participate in significant audits. This diversification can lead to more innovation and improvement in audit practices across the industry.

7. Stakeholder Confidence: Enhanced audit quality and transparency resulting from joint audits can increase stakeholder confidence. Investors, regulators, and other stakeholders are likely to have greater trust in financial statements that have been scrutinized by multiple reputable firms.

8. Regulatory Compliance: In regions or sectors where joint audits are mandated, adhering to this requirement ensures compliance with regulatory standards. This compliance can enhance the reputation of the audited entity and prevent potential legal or regulatory issues.

However, measuring the effect of joint audits on audit quality has proved challenging. There are also difficulties in differentiating between the effects of the involvement of another audit firm, and other factors such as the business environment, legal systems, regulator behaviour and corporate governance requirements. And any benefits arising from the involvement of another audit firm may be offset by other factors, such as difficulties in interactions between the two firms.

The research evidence available on joint audits is far from compelling in terms of providing positive support for the impact of joint audits on audit quality. On the other hand, there is no compelling evidence that suggests any significant deterioration in audit quality where joint audits have been replaced with audits by a single firm. Co-operation is required in joint audits, and it may require regulatory reinforcement. In a joint audit, both firms would need direct access to audit committees, so that the performance of one audit firm would not be assessed through the eyes of the other.

A comparative case study by Fatma Jemaa (Copenhagen Business School – Department of Accounting), Kim Klarskov Jeppesen (Copenhagen Business School – Department of Accounting) and Nadia Mhirsi (University of Burgundy – Institut d’Administration des Entreprises (IAE) de Dijon CREGO (EA 7317)), dated 22 February 2022 analyzed the Mandatory joint audits in France and Denmark.

Recent financial scandals in the UK and Netherlands have brought to the forefront the issue of mandatory joint audits as a means to mitigate audit market concentration. This study draws on two longitudinal case studies of the French and Danish joint audit models to understand and compare how mandatory joint audits emerged and evolved. In both settings, after a series of financial scandals, joint audits appeared in the 1930s to increase auditors’ competence and independence. A few decades later, the various actors seemed to forget these original considerations and joint audits appeared to be taken for granted.

Soon though, the newly arrived big audit networks attempted to circumvent the rule, entering into conflict with non-Big auditors who saw mandatory joint audits as the only way to keep conducting large audits. In the French setting, the main association of auditors successively adopted regulatory measures that prevented the model’s material and symbolic erosion observed in the Danish setting, generating what we call regulatory layering. In Denmark, once the model eroded, big firms undertook relational work to provoke its disruption. These findings unveil the conditions under which mandatory joint audits can help reduce audit market concentration, providing timely information for regulators engaged in such discussions.

Conclusion:

Overall, joint audits represent a robust approach to auditing that can significantly enhance the reliability and credibility of financial reporting while promoting a more competitive and diverse audit market.

However, challenges like allocation of work among the joint auditors, documentation of allocated work and coordination among the joint auditors should be dealt with due care.

Further, the Institute of Chartered Accountants of India should conduct a research or study on the effects of joint audits in India. The study or research may reveal some hidden facts.

References:

1. “Mandatory joint audits in France and Denmark: A comparative case study” by Fatma Jemaa (Copenhagen Business School – Department of Accounting), Kim Klarskov Jeppesen (Copenhagen Business School – Department of Accounting) and Nadia Mhirsi (University of Burgundy – Institut d’Administration des Entreprises (IAE) de Dijon – CREGO (EA 7317)), dated 22 February 2022.

2. The paper issued by the International Federation of Accountants (IFAC) on “Joint Audit: The Bottom Line – No Clear Evidence”

3. ICAEW Thought Leadership “Shared and Joint Audits: are two auditors better than one?

4. icai.org.in

5. rbi.org.in

6. irdai.gov.in