No single corporate client or group should account for more than a tenth of the total revenues of any audit firm and its associates, a committee on corporate governance set up by industry body Confederation of Indian Industry (CII) has recommended to the government.
With multinational consulting firms undertaking audit assignments through their affiliates in India, such affiliations could lead to “too much of revenue dependence on a particular client causing potential threats to auditor independence”, the panel led by former cabinet secretary Naresh Chandra said in its report.
The committee has also recommended that the government should oversee the quality of audit process, currently the sole domain of accounting rule-maker Institute of Chartered Accountants of India (ICAI).
With auditors’ role coming under scanner following the financial scandal at Satyam Computers, the government is planning extensive changes to the laws guiding the role and functioning of auditors. The 10% limit suggested by the committee will include earnings of the audit firms’ subsidiaries, associates or affiliated entities.
This is aimed at checking over dependence on one particular client for business, which could accentuate the conflict of interest already inherent in the audit business.
The report of the task force, formed in the aftermath of the Satyam financial scandal, will be released on Monday by minister for corporate affairs Salman Khurshid.Auditors are employed by a company to review its accounts and get paid for the same. Their reappointment is also largely a management decision.
This arrangement creates risks of the auditor not acting independently. The risk increases if another affiliate of the auditors has some non-audit business with the company.
Every company must obtain a certificate from the auditor that together with its consulting and specialised services affiliates, or network entities, it has not undertaken any prohibited non-audit assignments for the company and is independent vis-a-vis the client firm, the report has suggested.
Foreign audit firms are not allowed to do statutory audit in India, so firms such as Price WaterhouseCoopers (PwC), KPMG, Ernst & Young (E&Y) have entered into informal tie-ups with domestic accounting firms while they themselves provide non-audit services to the company.
Non-audit services which typically comprise of services like advisory, corporate finance and tax are catered to by these MNC consultants, while audit (assurance in accounting jargon) is conducted by the local audit firms that are network firms of the MNC. In India, SR Batliboi does this work for E&Y, AF Ferguson and CC Choksi for Deloitte, BSR & Co for KPMG and PriceWaterhouse and Lovelock & Lewes for PwC.
The ICAI has sought details from Indian CA firms on their functional and revenue-sharing agreements with international consultants. It has also raised its reservations against the operation of MNC audit firms in India, and has also put forth its concerns over the issue before the ministry of corporate affairs.
To strengthen the ICAI’s quality review board and ensure quality, an oversight mechanism on the lines of Public Company Accounting Oversight Board (PCAOB) in the United States could be put in place, the committee has said.
PCAOB, which is the audit oversight body in the US, was set up under the Sarbanes-Oxley Act, which fell in place after the Enron accounting scandal.