Committee of Experts Submits Its Report on Regulating Audit Firms and the Networks (Download PDF)

(December 26, 2018)

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Committee of Experts submitted its report to Ministry of Corporate Affairs presenting its findings & recommendations on regulating audit firms & their networks. Report addresses issues raised by SC w/focus to strengthen legal regime of auditors & promote development of audit profession in country.

Committee adopted holistic methodology that included internal meetings, engagement w/relevant stakeholders, examining past reports discussed in SC’s judgment, global literature, & best practices in auditing landscape.

Committee was ably supported by research work of National Institute of Public Finance & Policy.

Key Recommendations of Committee:

Audit Structures in India:

• There are 3 types of structures used by audit networks operating in India:

• Domestic networks of firms set up by CA registered w/ICAI,

• International networks where domestic CA firms tie up w/entities outside India thru membership agreement

• International networks where domestic CA firms tie up w/Indian member firms of international entity, thru sub-licensing.

Oversight of Audit Profession:

• National Financial Reporting Authority (NFRA) must be empowered to publish their audit inspection results.

• Loss of reputation, from adverse report, can be effective deterrent for audit firms to build better internal checks & balances.

• Investors can make more informed choices if they have better information abt performance of auditors of listed entities.

• There are benefits of having multiple Self-Regulatory Organisations in audit profession. It can generate competition among them which can help development of profession.

Using Brand Name:

• Branding w/international networks would increase competitiveness of Indian audit firms.

• Indian companies may benefit from using Indian audit firms which are members of international networks w/brand name.

• Using such international brand names may be commercially advantageous to Indian companies for various reasons ranging from ease of access to foreign investment to better bonding w/their clientele abroad.

• To effect this, it recommended that appropriate amendments should be made to Chartered Accountants Regulations, 1988 & Code of Ethics, 2009.

Legal Regime of Liability:

• Current regime of liability of individual auditors & audit firms is adequate.

• NFRA should be empowered by law to impose monetary penalties on international networks w/whom Indian audit firms have entered into membership, if there is audit failure or fraud.

• Amount of penalty on such international network/entity should be up to 5 times amount of penalty imposed on audit firm.

• To enable NFRA to perform this function, every auditor & audit firm, which is operating in India as part of international network, should submit Annual Transparency Report to NFRA, disclosing certain details. These include:

• description of network including details of payment b/w Indian audit firms & its network entities

• details of ownership & management structure of outside entities constituting network.

Providing Non-audit Services:

• Audit firms across jurisdictions often provide services as part of one common network.

• It recommended permitting firms to provide non-audit services to Auditee Company or its holding or subsidiary company, subject to certain conditions. These include:

• If auditor is part of international network, capping fee from non-audit services to 50 % of audit fee earned by network from that auditee company or its holding or subsidiary companies, in F. Y.

• Auditor must disclose audit & non-audit fees earned by its network to NFRA

• Auditor must file declaration w/NFRA stating that revenue earned from non-audit services does not exceed 50 % of audit fee.

Advertising:

• CAs/CA firms should be permitted to advertise their services & solicit work, subject to certain conditions. These are:

• Advertising/soliciting should not be conducted in manner which is false, or misleading,

• Services/claims promoted should not be false, or misleading

• No disparaging references or unsubstantiated comparison to work of others should be made.

- Published/Last Modified on: December 26, 2018

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