Auditor rotation critical for better corp governance

The introduction of a mandatory rotation clause for auditors in the new Companies Bill is expected to significantly improve the quality and integrity of auditing, a study on auditor tenure by voting advisory firm Institutional Investor Advisory Services.

Several top companies tend to stick with their auditors for excessively prolonged periods of time, which puts a question mark on the independence of the auditors and their ability to provide a balanced judgement on the accounts, it said.

The study found that many big groups have not changed their auditors in several years.

While critics flay the high replacement costs that companies will have to incur to rotate auditors periodically, advocates of the move believe it will significantly improve the quality and integrity of the audit process.

The draft Companies Bill, which is likely to be passed in the ongoing Parliament session, has come down in the middle as it advocates rotation after five years with the flexibility to extend it to 10 years, after which there is a

mandatory cooling off period for five years.

The study said 25 per cent of the 286 listed companies have their association with auditors stretched well beyond 10 years.

This includes nearly 55 per cent of the Sensex companies and 40 per cent of the Nifty companies.

In contrast, banks and public sector companies, generally have auditors for less than five years.

However, with the passage of the new Companies Bill, this long association between a company and its auditors is set to change.

Companies will have to mandatorily change their auditors is a welcome development, the survey said.

"Institutional investors generally view the quality of financial reporting as the most important parameter while deciding to invest in a company.

"Hence, any doubts regarding the integrity of the audit process will create a negative perception amongst investors," it said.

"Mandatory rotation will not only bring in a fresh perspective on the financials, it will also keep the current auditors on their toes as they will be aware that a new auditor may detect any irregularities in the accounting process," it added.