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Auditing firms face EU heat
July, 05th 2008

Auditing firms in the country could soon run out of business if they do not get themselves verified according to the guidelines mentioned in the Eighth Directive issued by the European Union (EU). EU will recognise balance-sheets of companies audited by firms that fit their specified standards.

With increasing interest in overseas operations, most domestic companies would shy away from appointing firms that are not recognised by the EU, said Rahul Roy, director, Ernst & Young India. They look at raising funds from Europe and it is important that their balancesheets are acceptable to the firms there, he explained while talking on the sidelines of the seminar on International Financial Reporting Standards(IFRS) organised by the Bengal Chamber of Commerce and Industry.

EU has released three lists in the directive and India comes under the second list that includes countries that do not have an EU equivalent auditing system yet but have the potential to do so within the next two years. Around 160 countries have not been recognised in the Directive.

According to the Eighth Directive that came into effect from June 1, a firm needs to be verified by a public oversight system in their own country. Around 50 per cent people in that evaluating body will have to be people who are not practising chartered accountants(CAs) for the last 15 years, explained Roy who was also the ex-president of the Institute of Chartered Accountants of India(ICAI).

This rules out ICAI as the body that will evaluate firms. The Quality Review Board, formed by the government of India(GoI) last year to ensure that the accounting profession in the country delivered quality, could possibly take up the role of reviewing auditing firms, Roy told reporters here.

The Board comprises five government nominees, five members of ICAI and one chairman nominated by the GoI.

Each firm would also have to publish a transparency report that will include details like the list of clients, income from fees, percentage of income from audit as well as the principle for determining the remuneration of its partners.

"There are roughly 150 auditing firms in the country right now and around 70 per cent of them are small and medium firms," Roy said. The directive has given a concession period to List 2 countries till December 2010, beyond which it will not recognise balance-sheets audited by such firms. A recent survey done by the EU showed that while it relied on balance sheets audited by firms from 70 countries, India perhaps had the largest share at 80 firms compared to the US that had 47 firms that were recognised by companies in the EU, Roy explained.

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