Cap auditors' tenure to 10 years: IIAS

Proxy advisory body Institutional Investor Advisory Services India (IIAS) has called forperiodic rotation of auditors and also capping their tenure at 10 years.

"To preserve the integrity of the auditing process, IIAS expects the tenure of the audit firm to be capped at 10 years, which though is an increase from the proposed five years andwould recommend voting against reappointment of vintage auditors," the advisory firm said in a statement.

An auditors' tenure of over 10 consecutive years blemishes the objectivity of the audit process and the independence of the auditor, it further said. However, it also noted that as many as 25 of the Nifty-50 companies and 17 of the 30-share Sensex companies have auditors who have been with these companies for more than 10 years.

More importantly, only two of these companies have rotated their auditors in the current proxy season. The rest have sought refuge in the three-year transition window. It can be noted that periodic rotation of auditors is an accepted governance practice. Under the Banking Regulations Act 1949, banks must change their auditors every four years.

The Companies Act 2013, including the provisions of Section 139, has been in the works for a while. The body has also called up on shareholders to vote against reappointment of vintage auditors, despite the window-period afforded by the new Companies Act, as it feels that good corporate governance practices transcend regulatory requirements.

Even though the regulations provide a three-year transition window from April 1, 2014 for compliance, IIAS believes that good corporate governance practices transcend regulatory requirements. In a bid to strengthen the financial reporting framework, Section 139 of the Companies Act 2013 mandates rotation of individual auditors every five years and of the audit firm after a maximum period of 10 years (after two terms of five years each) in listed companies.

A cooling-off period of five years after the stipulated threshold is required to be considered eligible for re-appointment. Section 139 is applicable with retrospective effect, which means the existing term of the current auditors will be taken into account for computing the overall tenure.

The Act has provided a transition window--instead of making immediate changes, companies with vintage auditors, tenure of 10 years can comply with the rotation equirement anytime within three years from the date of commencement of the Act as on April 1 2014.