The Hindu Business Line : Auditing is no mega serial

THERE is a raging debate in India as to whether the tenure of an auditor should come to an end after a fixed term. The Institute of Chartered Accountants of India (the ICAI) is all set to elicit the opinion of its one-lakh-strong membership on this seminal issue by conducting a referendum.

Members' views will be sought on whether the country should embrace the concept of rotation of auditors or the concept of joint audit. Curiously, the ICAI has refrained from adding the third option — appointment by a neutral body such as SEBI.

In fact, yours sincerely has been steadfastly canvassing through these columns for appointment by a neutral body such as SEBI when it came to the question of office of auditor of listed companies.

Predictably though there have been angry responses, some bordering on outrage. "How can we retreat to Nehruvian socialism?" fumed one esteemed reader.

A little reflection would show that the ultimate solution lies in ushering in a system of neutral appointment periodically. This system, too, is a subset of the concept of rotation. Only the appointing authority is not the company management but a neutral body. This is as it should be.

There is no reason why hackles should be raised when a governmental body is brought into the picture.

One should not tilt at the windmills. Has not the system of neutral appointment worked reasonably well in case of public sector audit where auditors are chosen from a panel maintained for this purpose by the C&AG? One shudders to think of the quality of bank audits if it were not for the system of appointment by the RBI out of panel of bank auditors.

To be sure, bank audits in this country leave a lot to be desired. But it could have been worse had the individual banks been empowered to appoint their own auditor.

The US, in the wake of the Sarbanese Oxley (SOX) law, has reconciled itself to the idea of rotating the lead audit partner periodically.

The Naresh Chandra Committee has chimed agreement with this on the ground that if the firm itself is changed periodically it will impact on the quality of the audit work given the fact that, according to it, it takes a couple of years to get familiarised with an industry.

Rotation of partners, sans rotation of firm, would be a farce to say the least. It is height of romanticism to wish that there would be an impregnable Chinese wall erected between two partners in a firm of auditors.

After all they share the same profits and thus effectively eat off the same plate. And it would be idle to expect the old partner not to whisper a trick or two into the years of his successor.

Moreover, if a management can cultivate the partner one year there is no reason why it cannot cultivate the next one given the fact that both are going to share the same sweepstakes.

Only rotation of firm of auditor, branch and roots, will bring about the divorce between an entrenched auditor and devious managements. And for this rotation to carry meaning, the appointer should be a neutral body.

Will a new firm be all at sea for a couple of years as the Naresh Chandra Committee apprehends? It seems this fear is largely exaggerated if not chimerical.

After all, a statutory auditor is not an internal auditor. An internal auditor needs to be familiar with the uniqueness of operations and systems. A statutory auditor, all said and done, even today remains riveted on the truth and fairness aspect of accounts.

At any rate, SEBI, assuming that it will be the appointing authority, would insist upon minimum number of senior partners a la the C&AG.

sAnd these senior partners will certainly come to terms with the new scenario after a brief period of initiation. In fact, they may even be expected to bring to bear a freshness of approach to their new assignment.

The system of neutral appointment and the concept of joint audit are not mutually exclusive much less in conflict with each other. In fact they should go hand in hand.

The C&AG experience should bear this out. My vote, therefore, is for both, rotation of audit as well as joint audit, but with a rider — the appointing authority will be a neutral body and not the incumbent management, not even the de jure appointing authority, the shareholders.

One should not be allowed to select his own jury. That a company is not exactly in the dock is beside the point. When probity is under scrutiny, which is the case when audit is done, a company must be like Caesar's wife — above any hint of suspicion.

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