The Hindu : Rotation of audit partners recommended

Online edition of India's National Newspaper
Tuesday, Dec 24, 2002

Business

Business

Rotation of audit partners recommended

By Our Special Correspondent

NEW DELHI DEC. 23. Set up against the background of massive accounting frauds in companies abroad, the Committee on Corporate Audit and Governance, headed by the former Cabinet Secretary, Naresh Chandra, has recommended that chief executive officers (CEOs) and chief finance officers (CFOs) of listed companies and public limited companies with paid-up capital and free reserves exceeding Rs. 10 crores or turnover exceeding Rs. 50 crores should certify the correctness of the annual audited accounts of such companies.

The committee has also said that not less than 50 per cent of the board of directors of such companies should be of independent directors. For reckoning this majority, nominee directors of financial institutions are not be counted either as independent or as functional directors. Also, the audit committees of these companies should consist entirely of independent directors, the committee said.

Incidentally, the committee has not favoured audit firm rotation, but has suggested that compulsory audit partner rotation.

Elaborating on this, the committee said the partners and at least 50 per cent of the engagement team (excluding article clerks and trainees) responsible for the audit of either a listed company or companies whose paid-up capital and free reserves exceed Rs. 10 crores or companies whose turnover exceeds Rs. 50 crores, should be rotated every five years. However, if required such rotated personnel could be allowed to return after a break of three years.

Another recommendation is that a special resolution, disclosing the reasons, be required whenever an auditor, who is otherwise eligible for re-appointment, is proposed to be replaced.

It has also suggested that certain business and other relationships, between an auditing firm and the client, should preclude the audit firm from undertaking audit assignments for that client.

To keep an eye on corporate fraud, the committee has suggested the setting up of a Corporate Serious Fraud Office in the Department of Company Affairs with specialists inducted on transfer or deputation and term contracts.

Simultaneously, it has suggested the setting up of independent quality review boards (QRBs), one each for the Institute of Cost Accounts of India, The Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India, to periodically examine and review the quality of audit, secretarial and cost accounting firms, and pass judgment and comments on the quality and sufficiency of systems, infrastructure and practices.

The QRBs should comprise persons of eminence, apart from the council nominees, the committee has said in its report made public today.

Another recommendation is that non-executive directors should be exempted from certain civil and criminal liabilities in the Companies Act, and which arise from some other laws, such as the Negotiable Instruments Act and the Companies Act.

The full report of the committee has been placed on the website www.dca.nic.in and http://finmin.nic.in.

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