MCA invites suggestions/ comments on a consultation paper aimed at review/ amendment of existing company law provisions to enhance audit independence and accountability, latest by 28th February 2020, as under:
NOTICE INVITING COMMENTS ON THE CONSULTATION PAPER TO EXAMINE THE EXISTING PROVISIONS OF LAW AND MAKE SUITABLE AMENDMENTS THEREIN TO ENHANCE AUDIT INDEPENDENCE AND ACCOUNTABILITY
1. A consultation paper to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability has been placed on the Ministry’s website at www.mca.gov.in. It has been decided to invite suggestions/comments on the above consultation paper.
2. Suggestions/comments on above mentioned consultation paper along with justification in brief may be sent latest by 28th February, 2020 through email at firstname.lastname@example.org . It is requested that the name, Telephone number and address of the sender should be indicated clearly at the time of sending suggestions/comments.
Consultation Paper to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability
To solicit the views/ comments of other Government Departments, Regulatory Agencies and general public on suggestions relating to amendment in existing law to enhance audit independence and accountability.
B. Background and rationale for review
The concept of Auditor independence requires the auditor to carry out his or her work freely, with integrity and in an objective manner. Though auditor is appointed by the shareholders, effective power of their appointment and dismissal lies with the management. Hence, time and again, audit independence has been questioned, as to whether the auditor really doing justice to the interest of shareholders and is staying true to the audit profession. Also, the auditor’s responsibility is not limited to shareholders, as audit report is a public document relied on to by various stakeholders, including Financial Institutions, Government and general public.
2. Broadly, the auditor’s financial or other interest in client’s business inappropriately influence his judgement or behaviour and a conflict of interest always exists, which may result in the auditor turning a blind eye to potential risk or at the extreme ignore an impending/occurred fraud.
2.1 There is self-interest threat due to reliance of auditor on the fee from the client. This is manifested in various ways and results in various negative consequences.
2.1.1 In order to sign clients, it is observed that audit firms quote competitive prices, not commensurate with amount necessary to undertake quality audit. This may result in auditors/ audit firms deploying lesser resources than needed for the audit, limiting the scope of their work etc, all resulting in sub-par audit.
2.1.2 Auditors and audit firms want to hold on to clients after the completion of auditing assignments, in order to provide other services (like management consulting, book keeping etc). This also affects the independence of the auditor.
2.1.3 Income from other services provided by the auditor (other than ones disallowed by the Act) also affects how far the auditor may be influenced by the management.
2.2 Sometimes, the self-review affects the independence of the auditor if the auditor is auditing his or own work or work that is done by others in the same firm. For example: The auditor prepares the financial statements for ABC Company while also serving as the auditor for ABC Company. Even if the auditor has previously provided other services to the company, his independence may be affected as his work may now need to be scrutinised by him/his firm.
2.3 Many times, the auditors involve in promoting the client to the point in which their objectivity is potentially compromised, resulting in advocacy threat. For example: Promoting shares in an audit client; Acting as advocate on behalf of client in resolving disputes with third parties.
2.4 Sometimes, due to a long or close relationship with a client or employer, an auditor is too sympathetic to their interests or accepting of their work. A familiarity threat exists if the auditor is either too familiar with employees, officers, and directors, or keeps a long-standing relationship with the client. For example: Auditing same client for numerous years; Having a close relationship with director, officer, or employee in position of influence over engagement subject; Previously having worked with or held office in engagement client.
2.5 An intimidation threat to independency also exists if the auditor is intimidated by management or its directors to the point that they are deterred from acting objectively. Threat that an auditor will be deterred from acting objectively because of actual or perceived pressures, including attempts by client to exercise undue influence over the auditor. For example: Being threatened with dismissal as auditor of client; Being threatened with litigation; Being pressured to reduce extent of work below what is required in an attempt to reduce fees.
3. Recently various instances of failure of auditors have been noticed such as IL&FS case etc., and it is also seen that the quality of audit reports have been compromised. In most of the cases the auditor appears to be hand in glove with the management and therefore the question on their independence and accountability have been arisen. In order to pluck the aforesaid scenarios/ instances, the Ministry is of the view that the existing regulatory provisions relating to Audit and Auditors in Companies Act, 2013 and its Rules along with Standard of Auditing need to be reviewed. (contd… please refer above attachment)
ICAI also has invited suggestions/ comments from members on Consultation paper of MCA to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability by 12.00 Noon on 21st February, 2020: ICAI Announcement dt. 18 February 2020