Audit firms in India are facing the threat of losing their business with around 200 Indian companies listed in various European bourses due to the new transparency requirements for auditors in the European Union (EU).
The strict norms governing advertisements of Indian audit firms prevent them from publishing certain sensitive business details that EU requires them to disclose in a statement called transparency report.
The idea is to ensure that EU investors who make investment decisions relying on the words of these non-EU auditors, know them very well.
After the ongoing transition period, most EU member states will enforce the disclosure requirement by December 2010, said a senior partner in a large multinational audit firm. EU member states have given the same deadline for Indian companies to comply with the International Financial Reporting Standards (IFRS) too.
As the statutory auditor of Indian companies listed in EU bourses, Indian audit firms scrutinise various entries in their financial statements and expresses satisfaction or dissent in the auditors 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.
Indias accounting regulator, the Institute of Chartered Accountants of India (ICAI) had allowed auditors and audit firms in India to advertise as per strict guidelines. The existing advertisement guidelines for auditors do not permit display of client names, while the transparency report requires the public listed clients of the auditor to be disclosed, said Rahul Roy, Director, Ernst and Young India.
If Indian statutory auditors of EU-listed companies are unable to comply with the norms by next year end, it may lead to loss of business for them. Besides, their clients may have to hire highly-paid local auditors in Europe. There is also a possibility of EU asking for re-auditing of financial statements, which may drive up costs for the companies.
Another EU requirement is that statutory auditors should be compulsorily monitored by independent oversight boards which have a majority of non-practising chartered accountants (CAs). The governing body of Indias accounting regulator ICAI comprises mainly practising chartered accountants.