The Confederation of Indian Industry (CII) has opposed the corporate affairs ministry move to rotate auditors and audit firms compulsory.
The provision for rotation of auditors has been included in the Companies Bill, 2009, recently been vetted by the Parliamentary Standing Committee on Finance.
The rotation of audit firms does not serve any purpose, and defeats the very purpose for which it is being introduced. Inclusion of this provision in the Companies Bill thus requires reconsideration, a CII official said.
Rotation of auditors was introduced in the Corporate Governance Voluntary Guidelines 2009 issued by the Ministry of Corporate Affairs during the India Corporate Week 2009. The Guidelines provided that while audit partners be rotated once every three years, audit firms be rotated once every five years. However, the ministry has now attempted to make this mandatory.
By the provisions included in the Bill and endorsed by the Standing Committee, an auditor (individual or firm) can be appointed or reappointed in a company for a period of five years, while the audit partner in the audit firm has to be rotated on completion of three consecutive years. The cooling-off period has been stipulated at three years in case of individual auditors and audit partners and five years in case of firms.
We feel rotation of auditors may not be the most efficient way to strengthen auditor independence and improve audit quality. It may, in fact, reduce the effectiveness of audit as the new auditor will need time to become familiarised with and understand the business of the company, CII said.
According to CII, the international norm for rotation of audit partners in most jurisdictions is at least six years. The three-year period prescribed in the report and guidelines is extremely short, considering the complexity of audit assignments which are peculiar to each company.