Nearly 200 Indian firms listed on European bourses may be forced to either re-audit their financial statements by European auditors or face regulatory action including delisting. The audit firms which sign the financial statements of most of these companies do not adhere to several requirements for statutory auditors that EU wants member-states to implement from June 2008.
The new guidelines under EUs eighth directive propose to make auditors disclose more and get them monitored by an independent oversight body. The rationale for the new norms is that European investors rely on the judgement and views of these auditors for making investment decisions.
Therefore, Indian companies listed on EU bourses may have to either get their securities delisted or get their balance sheets re-audited by audit firms there. This, accounting experts believe, will drive up their costs manifold.
It remains to be seen how EU deals with non-compliance and whether it provides a grace period for non-EU companies to comply with the norms.
About 80 Indian audit firms lead the pack of non-EU firms auditing the books of non-EU companies listed in Europe, followed by about 46 American firms auditing US companies listed on EU bourses, experts told ET, quoting an EU survey early last year.
While the new rule means additional work, higher cost of compliance and the worst possibility of delisting for Indian companies raising funds from there, for the audit firms located in India and signing their books, it means a potential loss of business.
The statutory auditor scrutinises various entries in the financial statements and expresses satisfaction or dissent in his report. The EU wants these auditors to disclose their total earnings from audit and non-audit services as well as the amount the firm pays its partners. The independence of audit could be compromised if the auditor also gives advisory or non-audit services.
As per the new norms, the statutory auditor should be compulsorily monitored by independent oversight boards which have a majority of non-practising chartered accountants (CAs). Sources in audit firms pointed out that the professional regulator in India, the Institute of Chartered Accountants of India (ICAI) includes mainly practising CAs and may not fit into EUs definition of independent professional oversight body.
Countries like India have a great stake in how the eighth directive is interpreted by various EU nations. Particularly, we have to closely watch whether EU considers our oversight system adequately independent since it is not manned predominantly by non-practitioners as required.
At stake is the ability for Indian auditors to continue to serve clients listed on EU, said Ernst & Young India director Rahul Roy. However, ICAI is confident it can tackle the situation. President Ved Jain said We have a quality review board comprising six government nominees and five ICAI nominees. I am sure they will be able to handle this issue.