Joint audit move faces resistance

New Delhi: Many auditing firms and industry chambers have objected to a recent government panel suggestion to have mandatory joint audit of financial statements for certain classes of companies. Such a measure will have no meaningful impact on audit quality, rather it will impose extra costs on corporates and exacerbate audit risks, they say.

The company law committee (CLC) of the Mini-stry of Corporate Affairs has recently recommended that the Companies Act, 2013 be amended to enable the central government to mandate joint audits for such class or classes of companies as may be prescribed by the central government. The provisions concerning the extent of individual auditors' liability in the case of a joint audit should also be provided in the Act. The Reserve Bank of India has already made joint audit mandatory for entities with an asset size of Rs 15,000 crore and above for annual accounts.

"The world over, joint audits have not resulted in a marked improvement in audit quality. Independence in an audit is exclusive of the auditor and hence cannot be shared as two people's take on independence can differ," said Mohan R. Lavi, partner K. P. Rao & Co.

There is also an inherent issue in the way joint audits are done. The joint auditors are assigned different areas of the audit but issue a joint audit report- a tacit acceptance that they take responsibility for the audit jointly. In some joint audits, one firm calls all the shots while the other only participates in the audit, so the "audit quality remains status-quo-ante," he said.

Vinod Kashyap, director, NextGen, said, "Joint audit is neither a substitute for domain knowledge nor is a global best practice for improving audit quality. If the objective is to improve audit quality, the first and foremost step required is strengthening internal finance controls in India, which are weak due to deficiency in auditing standards."

Industry bodies such as CII, Ficci, among others, are also not in favour of joint audits on the ground that it will increase audit costs without improving audit quality and will have a negative impact on the ease of doing business. "Joint audit is not suitable in the Indian context as it is not aligned with the ease of doing business. The current framework is adequate for the voluntary appointment of joint auditors. The mandatory joint audits will impose unnecessary costs on corporates, exacerbate rather than mitigate audit risks," said a CII source.
Looking at the practices internationally, the joint audit is on the decline as most nations that once had such an audit mandate have discontinued it. Several countries such as the US, UK, China, Brazil and South Korea besides the EU, have not mandated joint audits. Also, the countries like Canada, Sweden, and South Africa have abolished such laws, primarily because of increased costs and no apparent beneficial impact on audit quality.

However, the Institute of Chartered Accountants of India is in favour of joint audits, as that will increase the share of local auditors in a market dominated by the Big Four, namely, EY, PwC, Deloitte and KPMG. The big names are, obviously, not pleased with the proposal, fearing their audit fees will get shared.