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Cos Bill 2012: Auditor's New Avatar

Published on Tue, Apr 09,2013 | 16:10, Updated at Tue, Apr 09 at 16:11Source : 

Impact Assessment of the Auditor’s Role under the New Companies Bill, 2012

By: Sriraman Parthasarathy, Partner, Deloitte Haskins & Sells

The new Companies Bill, 2012 ("the Bill") expects the Statutory Auditors of a company to play a challenging and new role to meet the ever increasing governance expectations of the stakeholders. Whilst additional responsibilities imposed on the auditors by the proposed Bill will definitely help in enhancing the image of the audit profession, the ability of the auditor and the practical aspects relating to the execution could pose serious challenges for the auditor in tackling his "New Avatar". This would require a complete overhaul of the audit profession / practices so as to equip itself adequately to discharge the new responsibilities thrusted on it by the Regulators.

Some of the significant changes proposed in the Bill that could have a serious impact on the audit profession are listed below:

*Direct Reporting of Frauds by the Auditors to the Central Government.

*Reporting on the Operating Effectiveness of the Internal Financial Controls.

*Reporting on the Propriety Aspects.

*Access to the Principal Auditors of the records of the Components/ Subsidiaries (not audited by the Principal Auditors) relating to the Consolidated Financial Statements. 

*Redefining the Relationships with Clients - Rotation / Restriction on Services.

*Oversight by the Government Regulator.

Auditor as a CBI Officer & Informer?

On enactment of the Bill, if an auditor of a company has reason to believe in the course of the performance of his duties as auditor that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. No doubt the Regulator has added this reporting requirement of direct reporting to the Government thanks to the major corporate scandals. However, several aspects such as the definition of "fraud", the modus operandi and timing of reporting, legal consequences, etc. could pose serious challenges to the auditor in implementing it.

Auditor as a SOX Specialist?

The Bill requires the auditor to comment on whether or not the company has adequate internal financial controls system in place and the operating effectiveness of such controls. It is true that the soundness of the internal controls is important for any financial reporting; however, one has to remember that for forming an opinion on the financial statements, the auditor evaluates the internal controls only for designing his audit procedures and not for commenting on the operating effectiveness of such controls. Hence, for the purpose of meeting this new requirement, he has to necessarily carry out detailed/ comprehensive procedures, similar to the reporting requirements of the Sarbanes-Oxley Act (SOX) in the United States.

Auditor as a Comptroller and Auditor General (CAG)?

The next avatar the statutory auditor of a private sector corporate entity is expected to take is in the form of an auditor being a CAG! The Bill requires the auditor to report on financial transactions or matters which have any adverse effect on the functioning of the company. This would imply that the aspects of propriety need to be looked into and the matters triggering concerns on reasonableness/ genuineness of transactions need to be commented upon by the auditors. The new dimension of thrusting this propriety reporting by the auditor even in the case of the private sector is going to be challenging and infact exciting for the audit profession!

Auditor - One Stop Shop for All your Requirements?

Now a new requirement proposed is to present the audited group consolidated financial statements in addition to the standalone financial statements of a company, if it has any subsidiaries. This requirement applies to all companies and not only to listed companies. In this connection, the Bill proposes that the parent company’s auditor will have the right of access to the books and records of the subsidiaries. This would imply that the responsibility for the consolidated amounts of the component/ subsidiary needs to be taken necessarily by the parent company’s auditor. The current practice of relying on the component’s auditor for the financial statements of the component may not be acceptable if the intent of the legislation is to fix the overall responsibility for the consolidated financial statements entirely on the parent company’s auditor. As per the International Standard on Auditing (ISA) 600, the parent company auditor is responsible for the numbers in TOTO though the current Indian Auditing Standard provides for reliance by the parent company auditor on the work of the subsidiary auditor. Thus, the proposed Bill is in line with the international auditing framework and expects the parent company auditor to take total responsibility.

In addition, the Bill also seeks the auditor to comment on various aspects such as on the maintenance of accounts and other matters connected therewith as well, in addition to reporting on the true and fair view of the financial statements. With all the additional reporting obligations, the auditors are expected to act as "one stop shop" for all the requirements of the stakeholders!

Auditor - Hard Hitter?

The Regulators want the auditors to play the role of hard hitters by carrying out the audits diligently and also to appear independent both in letter and spirit. To ensure this, the Bill proposes several measures such as:

* introduction of the concept of rotation for listed and other entities to be prescribed.

*prescribing various conditions for becoming eligible to accept an audit appointment, including not having any business relationships either directly or indirectly.

* prescribing a long list of proscribed services for the auditors.

It is expected that with the new powers/ responsibilities and the restrictions imposed, the auditors would be in a stronger position to carry out a better job and also meet the independence expectations of the stakeholders.

Auditor Beware!!! – NFRA as Auditor’s Auditor

How about a super/ powerful body which would combine the powers of a Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission (SEC) of the USA and the various financial and audit professional regulators of several other countries? The Bill has introduced a body called "National Financial Reporting Authority" (NFRA) which would be a supreme body for setting standards for accounting and auditing matters, monitoring and enforcing compliance, overseeing the quality of the audit service, etc. It would also have the powers normally vested in a civil court under the Code of Civil Procedure Code. By way of having an independent regulatory oversight over the auditors, the Regulator would be keen to ensure complete adherence of the regulatory expectations by them. The auditors would have to be cognizant of this new requirement and make sure that all their acts are defendable before this new Regulator.


On enactment of the Bill, the role and the responsibilities of an auditor will change dramatically. He would be expected to take several Avatars, which would change the profession upside down. Implementation of several principles/ provisions of the Bill defining the role and responsibilities of the auditors would depend on the actual roll out of the rules which will deal with the procedural aspects. The rules will reflect the real intention of the legislation and greater clarity would emerge after the same. Further, interpretations/ clarifications/ guidance/ practices will keep coming till such time the dust settles down after the enactment. In spite of all this, the fact remains that time has come for a change in the audit process which is one of the cornerstones of corporate governance. We should remember the famous quote of Victor Frank, which reads as "when we are no longer able to change a situation, we are challenged to change ourselves!


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