SEBI's proposal to amend the Listing Agreement to enforce rotation of audit partners and to streamline quarterly and annual reporting is a welcome measure to improve credibility of financial results published by companies. These measures mark baby steps in cleaning up the accounting and auditing practices in India.
However, no one should expect these measures would actually curb the recurrence of Satyam Computer Services like accounting scandals. Rotation of audit partners, an international best practice, is long overdue. The proposal may, however, face stiff resistance from the chartered accountants community, even though many firms and the ICAI would agree rotation of audit partners as opposed to rotation of audit firms is definitely a more feasible option.
The discussion paper published by Sebi on Monday has suggested that the audit partner signing the accounts of a listed company be rotated every five years. The regulator should also consider mandating joint audits by two firms in the instance of very large businesses to ensure greater integrity of financial statements.
The argument against joint audits is that it can prove to be expensive for the companies. Rotation of audit firms is similarly opposed it is expensive to hire a new firm every few years, but more importantly, new firm takes time to understand the nature of the business of a client.
The proposal that the audit committee should approve the appointment of chief financial officers, without laying down her qualifications, places, rightly, the onus on the directors of the company to appoint the right man for the job.
The proposal to streamline quarterly and annual reporting by companies and making limited review by the auditors mandatory too should help improve the quality of numbers published by companies. The 45-day window allowed to companies to publish financial statements with limited audit review as against the current requirement of reporting unaudited statements within 30 days from the end of the quarter should give companies enough time to verify numbers before making them public.
The proposal to reduce the timeline for reporting full year results from three months to two months is an investor friendly measure, but would put pressure on auditors to finish their task faster.