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ICAI backs rotation of partners
July, 23rd 2009

Following the outcry over role of auditors in the Satyam scam, auditing regulator ICAI has recommended major changes in auditing processes, which include among other things, joint auditors for big companies and rotation of partners every five years.

These recommendations of a high-powered committee of ICAI, formed after the Satyam scam, will now be considered by the government. The committee, headed by ICAI president Uttam Prakash Aggarwal, was tasked with suggesting changes required to make the auditing process in India more effective and foolproof after the Satyam scandal shook corporate India and led to the arrest of auditors of Price Waterhouse.

"Joint audit is one of the major recommendations and the committee has said this could be mandated for listed public limited companies," sources in the know said, though Aggarwal refused to confirm. "The other major recommendation is rotation of partners every five years instead of the current stipulation of seven years," the sources said. The move aims at checking complicity between the company management and the engagement partner.

The concept of joint audit - where more than one firm audits the financials - is not very popular globally and out of the G20 countries, only France practices this. In India, public sector companies and banks have joint audits.

Ernst & Young's Rahul Roy, former president of ICAI, doubted the success of joint audits. "It is normally looked down upon globally. Also, while internationally all the joint auditors are responsible for the veracity of the entire audit, in India an auditor is held liable only for the portion of audit he has carried out. This is a serious defect that has to be rectified first," he said, adding that it would not be an effective tool to check against malpractice between management and a particular auditor. However, Sunil Talati, another former president of ICAI, said joint audit can be an "effective tool" to check malpractices or negligence in audits.

And while experts welcome rotation of partners, the only technical problem is that around 90% of practising CAs in India are sole proprietorships. "However, the concept of peer review has been introduced for the sole proprietorships to tackle this issue," sources said.

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