One-fourth of the 286 listed companies across Sensex, Nifty, BSE200, CNX2OO, Nifty mid-cap and all FO stocks have had the same auditor for over 10 years, according to findings by proxy advisory firm IIAS. The Ministry of Corporate Affairs’ threshold is of five years.
Some of these companies include Hindalco Industries which has not changed its auditor (M/s Singhi Co.) in the last 50 years.
Similarly the auditors for Reliance Industries (M/s Chaturvedi Shah, M/s Rajendra Co) and LT (M/s Sharp Tannan) have not been rotated for more than 30 years.
“We find that some companies tend to stick with their auditor for excessively prolonged periods of time, which puts a question mark on the independence of the auditor and their ability to provide a balanced judgement on the accounts,” added the report.
In contrast banks and public sector companies (PSUs) generally have auditors for less than five years. IIAS attributes this to the fact that the auditors for most PSUs and banks are appointed in consultation with the Comptroller and Auditor General of India and Reserve Bank of India which ensures frequent rotation of auditors.
The report states that in India, till now both the Companies Act and the Listing Agreement have been silent on the issue of auditor rotation.
“The only existing provision to this effect is found in the voluntary code issued by the Ministry of Corporate Affairs which prescribes an auditor rotation every five years. Unfortunately, since these guidelines are non-binding in nature, most private sector companies disregard them,” added the report.
In the past, critics of mandatory rotation have often highlighted increasing costs and declining efficiency as their primary objections to any form of tenure limit.
However, IIAS feels that introduction of a mandatory rotation clause for auditors in the new draft Companies Bill addresses the issue of auditor rotation as the draft Bill advocates rotation after five years with the flexibility to extend it to 10, after which there is a mandatory cooling off for five years.
“But it may change as the Bill is yet to be passed by Parliament,” cautions the report.
A recent IIAS survey of institutional investors, conducted jointly with Confederation of Indian Industry (CII), stated financial reporting to be the most important parameter while deciding to invest in a company.
“Any doubts regarding the integrity of the audit process creates a negative perception in the minds of investors. Breaking this existing relationship between companies and their auditors will be a critical step towards raising the corporate governance standards in India,” said Amit Tandon, Managing Director, IIAS.