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Audit Rotation – A Practical Guide

Published on Mon, Nov 23,2015 | 20:46, Updated at Mon, Nov 23 at 20:46Source : Moneycontrol.com 

In recent years, Mandatory Firm Rotation (MFR) has become a global phenomenon. The European Union (EU) has also passed a legislation to be applicable for Public Interest Entities (‘PIEs’) for its 28 member states from the year 2016. Every organisation that falls within the PIE definition1 is required to retender the audit. While the EU has prescribed guidelines, each member state may adopt country- specific regulations within this framework.

In India as well, MFR has been introduced to mitigate the perceived lack of objectivity that could result from long standing auditor client relationships. Periodic rotation has been introduced to protect stakeholder interests by creating a platform that facilitates independent and unbiased opinions by auditors. The Companies Act, 2013 (‘The Act’) has mandated MFR, effective from 1 April 2014, for a prescribed category of companies. Instead of the earlier provision of appointing auditors from one Annual General Meeting (AGM) to the next, an individual or a firm will be now appointed for a five-year term, and the appointment will have to be ratified annually by the shareholders. An audit firm can only be appointed for a maximum of two consecutive five-year terms. Post this, The Act requires a cooling off period of five years during which neither the audit firm nor any of its network firms can be appointed as auditors. The Act has also provided an initial transition period of three years to comply with the new regulations.

MFR is expected to have a significant impact on Indian companies. All listed companies and a large number of unlisted companies that meet the prescribed criteria will have to comply with the provisions of The Act. Indian companies have three years from 1 April 2014 to implement MFR and now have less than 18 months to evaluate and recommend the appointment of a new audit firm. In this document, KPMG aims to set out a road map for auditor transition and provide guidance to help you manage this process effectively.
Attachments : Auditor Rotation-A practical guide and approach.pdf
 
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