Recently MCA has released a Consultation paper to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability on 6th February, 2020. Read Here –MCA proposes amendments to enhance Audit Independence & Accountability

After release of MCA Consultation Paper ICAI has also issued a Consultation paper on 18th February 2018 by which ICAI invited suggestions/comments from members on Consultation paper to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability. Read Here-Suggest how to enhance audit independence & accountability: ICAI

In this article author gives his views on the Consultation Paper with Justification to Examine the Existing Provisions of Law and Make Suitable Amendments therein to Enhance Audit Independence and Accountability

Note- That every CA firm in India is capable to compete with Big4 & the suggestion and justification are submitted in a way that the MSME Companies other than listed companies and companies in which public has no substantial interest are kept out of the amendments i.e. No suggestions should be made applicable to these types of companies as MSME companies primary need ease of doing business.

Along with it, the suggestions should be made mandatory for the Companies which are as follows:-

A. Listed Companies on Stock exchanges in India

B. Companies having borrowing of Rs 100 Crore or more from any financial institution

C. Companies in which mandatory certification required by Big4 CA firms

D. Any other categories of companies which the Central Govt or MCA is of the opinion to be part it

SL. No. Para No Suggestion Justification
1 1.3 (a) What are the wayouts to remove economic concentration of audit with Big4? Mandatory Joint audit of all listed companies with maximum one auditor from Big4. This will break the oligopoly of Big4 in audit and homegrown CA firms will be one of the joint auditors.
(b) Whether number of audits under one audit firm/ Auditor be reduced?

 

Number of audits shall not be reduced rather a separate section in companies act 2013 shall be introduced which categorically applicable for the audit of Companies mentioned above as applicable for the audit of Govt companies where appointment of auditor is done by CAG. Another section related to Audit of big companies will do the needful.
(c) Whether the number of partners under one audit firm be reduced or fixed? Number of partners under one audit firm cannot be reduced or fixed as it is way of practice which the firm opt to do. This will not solve the purpose so continue with the same provisions as applicable.
(d) How the burden of these Big-4 can be reduced? Which other audit firms in India are able to compete with them and reduce the workload of Big4?

 

The burden of these big 4 can be reduced by developing the home grown CA firms.

All the audit firms in India are able to compete with these Big4 especially those firms being eligible for CAG or RBI audit have self sufficient resources to stand at par since every work happens to be for the 1st time for anyone and if the homegrown CA firms are given a chance to serve than I am confident that every CA firm who is entrusted with this work will stand for the profession and work in independence.

Indian CA firms are growing day by day and a support system to them will certainly equip them to do justice with the large audits. When the workflow, Indian CA firms can compete and work accordingly as these CA firms will only doing the statutory compliance of Indian laws only.
(e) Are the auditors in listed companies be appointed from a separate panel of auditors prepared by NFRA? All the auditors for the above mentioned companies shall be appointment by a separate panel prepared by CAG/SEBI and not by NFRA with respect to the categories and methodology adopted by them so as to have independence in appointment of auditors. NFRA is a regulatory body, panel by NFRA is not required rather those department who are working on these subjects like CAG/SEBI can be more responsible.

This will bring independence in audit and thus need of an hour now to have a separate panel for appointment of auditor of large entities.

(f) Whether the home grown Indian audit firms are equipped with the audit procedures, audit tools, manpower capacity to handle the audit of large organisations? Yes, the home grown audit firms are equipped with all the resources required to discharge their work. It may be possible that not all firm are that much equipped by the firms presently handling large PSU and Central Bank Audit has sufficient resources to handle large listed companies. For small listed companies, each CA firm in India is capable and compatible to work, it is just matter of time that they get the opportunity of work and serve. No justification required on this point.
2 2.4 What more non-audit services can be included in the list? How the self-regulation among the auditors can be increased? Any work other than certifying financial statements should fall under non- audit services. Self explanatory.
3 3.4 Whether the Joint Audit should be made mandatory for bigger companies?

What should be threshold for the bigger companies?

Wherever the foreign investor wishes to specify a particular auditor/audit firm having international network then the audit of such investee companies or companies should be carried out as joint audit wherein one of the auditors should not be part of Big4 or Multinational Network firm along with joint audit of companies listed on NSE with maximum one auditor from Big4 only. This will enable domestic CA firms to work and reduce the oligopoly of Big4 in India.
4 4.3 Whether the holding company’s auditor must also review the working papers of auditor of subsidiary and make mandatory comment on the account of subsidiary companies? No, the auditor of holding company should not be required to comment on accounts of subsidiary companies, only the work of the auditor of subsidiary can be used as per SA 600. This will affect the independence of auditor of subsidiary company.
5 5.2 Suggestions on the feasibility of creation and maintenance of panel of auditors for Non-Government Companies (Both Listed, Unlisted and Private Companies).What methodology can be adopted for creation of such panel of auditors? Panel should be made for the following excluding all MSME companies-

Listed Companies on Stock exchanges.

Companies in which public is substantially interested.

Companies having borrowing of Rs 100 Crore or more from any financial institution.

Companies in which mandatory certification required by Big4 CA firms

Any other categories of companies which the Central Govt or MCA is of the opinion to be part it.

It will bring independence in Audit.
6 6.2 Suggestions are invited to see the possibility of taking audit engagement letter on record along with ADT-1 to see if the same is not in violation of section 144 of the Act i.e., Non-audit services are not there in audit engagement letter? Also comments on further use of such engagement letter to enhance the independence of the auditor are solicited. Letter of engagement should not be submitted as attachment to ADT1 rather a pre-fill form should exist in form of E- Audit Engagement form along with ADT1 with check box and submitted accordingly just like E-MOA/AOA. It will immediately stop the auditor from performing Non audit services.
7 7.4 Whether the concurrent audit is to be made mandatory in big listed companies and what points should be included in the checklist to be developed in company audit in this regard. What should be the threshold for big listed companies for this purpose? Concurrent audit can be made optional and Internal Audit mandatory on big listed companies as with threshold limit of companies having borrowing of Rs 1000 crore or more including all Govt companies as well but with different selection criteria in comparison to selection of Statutory Auditor. Points in checklist can be differing as per the requirements & necessity of companies can be discussed and made in consultation with ICAI.
8 8.3 Whether number of audits under one audit firm/Auditor be reduced? Whether the number of partners under one audit firm be reduced or fixed? Rules regarding appointment of Auditor of Govt Companies under sec 139(5), auditor of banks as per RBI guidelines, similarly these categories of companies shall appoint auditor under new section or rules made by MCA as Appointment of Auditor of large companies and no change in the current process of audit appointment under companies act without reducing partner or audit as the case may be. Explained above.
9 9.4 Suggestions are invited as to whether disclosures are required to be made by the Auditor in his Audit Report? If yes, in what manner? No disclosures are required on this Para. Only rating criteria may be introduced if required to assess the probability of default. Rating will help as an alarm for the stakeholders without any difference of opinion. If comment is done mandatory then it will be subject to some litigation on long term.
10 10.2 Whether unlisted company whose parent company is a listed company should also require submitting quarterly returns to SEBI? Yes, quarterly returns shall be submitted to SEBI This will ensure timely check on any misrepresentation.
11 11.4 What qualitative and quantitive parameters should be included in such an index, how they should be measured, and which all companies should this be mandated for. What should be the thresholds for such companies? This can be done in consultation and involvement of ICAI having peer review board, other sufficient resources to measure the same. As ICAI is constituted under an act of parliament thus we can rely on the working of ICAI for this purpose.
12 12.4 Suggestions are invited on feasibility and mechanism of the inspection of audit engagements, manner and basis of selection of companies for such an inspection, agency which must undertake the same, whether audit firm level inspections also may be incorporated in this etc? This can be done in consultation and involvement of ICAI having peer review board, other sufficient resources to measure the same. As ICAI is constituted under an act of parliament thus we can rely on the working of ICAI for this purpose.
13 13.5 Whether the conditions as laid down by ICAI and SEBI should also be made mandatory for the auditors of other companies/bigger companies with reference to untimely resignation of Statutory Auditors? Yes, It should be mandatory for the auditors of all companies listed above to follow these conditions in case of untimely resignation of Statutory Auditors. This will help to identify the malpractice or any financial independence is not affected by the auditor on timely basis.

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