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Auditor rotation must for select unlisted public, private companies
April, 11th 2014

The Corporate Affairs Ministry has delivered a “mixed bag” for the audit profession in its new auditor rotation rules.

The CA Institute, regulator of the audit profession in India, had pitched for audit firm and audit partner rotation only for the top 100 listed companies.

While excluding small companies and one-person company from the purview of auditor rotation, the Corporate Affairs Ministry has mandated audit firm and audit partner rotation for all listed companies and certain unlisted public companies and certain private companies.

“I am not disappointed. We were keen that private companies in India be kept out of auditor rotation. But the Ministry has thought otherwise.

Anyway, they have to some extent addressed our concerns and kept a threshold even for the unlisted public companies and private companies,” K Raghu, President, Institute of Chartered Accountants of India (ICAI), told Business Line in his initial reactions to the new rules.

He also expressed satisfaction over the Ministry’s decision to refrain from notifying the national financial reporting authority.

For the first time, India is introducing mandatory auditor rotation — both at an individual auditor level and at the audit firm level. The implementation of this norm is expected to enhance auditor independence and audit quality.

The new rules released today by the Corporate Affairs Ministry said that rotation rules will also apply to public companies having a paid up share capital of ?10 crore or more, private companies having a paid-up capital of ?20 crore or more.

Auditor rotation rules will also apply for unlisted public companies with less than ?10 crore paid-up capital or private companies with paid-up capital of less than ?20 crore, but who have borrowed more than ?50 crore.

“The new auditor rotation rules are welcome. But the thresholds for private companies need to be revised upwards,” G Ramaswamy, former CA Institute President and current Member of International Federation of Accountants (IFAC) board, said.

He also highlighted that auditor rotation is still being discussed in international forums and is only slowly gaining traction in developed countries forming part of the European Union.

KPMG view

While auditor rotation is gaining momentum in the EU and many other parts of the world, extending the requirement to unlisted companies is unusual, Jamil Khatri, Global Head of Accounting Advisory Services, KPMG in India, said.

This may be particularly troublesome for unlisted Indian subsidiaries of global multinational companies since the rotation period and requirements in their home countries may be different from those prescribed in India resulting in challenges in audit of the consolidated financial statements, he added.

The threshold levels prescribed in the auditor rotation rules are “practical”, said Yogesh Sharma – Partner, Assurance at Grant Thornton India LLP.

This is a welcome change as it would provide significant relief for smaller companies, and to their auditors, from auditor rotation requirement not covered within these thresholds without muting the intent of the legislation, he added.

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