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

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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.

Image of Regulating Audit Firms

Image of Regulating Audit Firms

Image of Regulating Audit Firms

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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