Cos Act: Government for retrospective auditor rotation

The ministry of corporate affairs (MCA) has put out draft rules to accompany 16 of the 29 chapters in the new Companies Act. Some of these call for changes in accounting & auditors, reports CNBC-TV18’s Payaswini Upadhyay.

India has joined the league of 30 countries that mandate audit firm rotation, but to do so with a retrospective effect, is perhaps a first. The Companies Act 2013 requires listed companies and other notified classes to rotate their auditor after 5 years in case of an individual auditor and after two terms of 5 years each in case of an audit firm. For both, the cooling off time is five years. Also read: New Companies Bill to make doing business easier: Govt  The ministry has now proposed that the period for which an auditor has been working with a company before the notification be counted in calculation of this period. Also, a network firm cannot take over after the prescribed period is over. “If an auditor has completed 10 years of service, he rotates immediately subject to a transition period of 3 years. The rules also clarify that you can't have a network firm rotating in, if a network firm is going out. These things are good and make rotation applicable in the right spirit”, says Dolphy D’souza, partner at EY.   “But there are other things that put a black spot. If you're an auditor of a company and your brother or sister is invested in the company for an amount of more than Rs 1 lakh, you are disqualified”, adds D’souza. One provision in the draft rules that relates to accounts of companies has baffled the audit community. The companies act says that companies will have to report their accounts The rules propose that if under these prescribed accounting standards, a company is not required to report consolidated accounts because its immediate parent is outside India; it would still have to prepare consolidated statements. D’souza says, “Under IFRS, an intermediate holding company is exempted from preparing consolidated financial statements. Presumably, IFRS will become part of Indian accounting standards when they are notified in the companies law. Now the rules are saying that though IFRS permits an exemption, we do not believe that exemption will be provided under the law because we need to control the companies and groups based out of India.” Reporting 'material fraud' Frequent frauds or where the amount involved is not less than five percent of net profit or two percent of turnover for preceding financial year. On all these aspects, the ministry has given the industry time up to October 8 for a feedback.