Mixed response to Sebi's proposed audit rules

The proposed tightening of audit and disclosure norms, as mooted by a panel of the stock market regulator, Securities and Exchange Board of India, has evoked a mixed response from companies and auditors.

In an attempt to avoid Satyam-like frauds, a Sebi panel has suggested rotation of audit partners signing the accounts and giving more teeth to the company's audit committee (in clearing the selection of a CFO and ensuring the independence of the auditors), among other measures.

While some auditors say it provides a good framework to take governance seriously; others feel it is incremental and reactionary in nature, much like the US responded with the Sarbanes-Oxley Act after the collapse of Enron and Worldcom.

That's fine, as a good legislation is about responding to a situation in a time-sensitive manner, feels Jamil Khatri, head of accounting services, KPMG. "It will bring much higher levels of vigilance, conscience around governance on how the audit committee or audit partners take their jobs. It provides a good framework for people to start behaving in a needed manner, to bring governance into focus," said Khatri.

Take the proposal to make the audit committee responsible for the independence of the auditors. "If the audit committee is a rubber stamp, no amount of empowerment will help. But if you put more responsibility on the audit committee, they will become more vigilant," said an auditor, who didn't wish to be quoted on this aspect.

Typically, the big audit firms offer a range of services like tax audit and consultancy. An empowered audit committee may not allow non-audit services, both in terms of nature and volume of work. "It's a good check to ensure that auditors remain independent and conflict-free, both in form and substance," explained an auditor.

The proposal to rotate audit partners every five years will be a good check on auditors who may otherwise become complacent if they remain auditor for a company for life. In today's environment, this will make the auditors more diligent. As companies have more complex operations, rotating partners is a better option than rotating audit firms.

But this could also restrict the growth of small audit firms, who have just two or three partners. They will be left with no option but to merge with other firms to acquire scale. Unless the proposal is implemented with prospective effect, which will give these firms time to organise, it could hurt their business. Many listed companies are still audited by small audit firms, though many bigger companies have moved to the big four.

But auditors feel it's impractical to give the audit committee a say in the selection of the CFO. They feel this is not a constructive step, as the audit committee may end up being a rubber stamp. "They don't have the competence to judge a CFO. It's very judgemental, and they may not have the basis to doubt the competence of a CFO," said a CFO.

Experts say nowhere else, not even in the US, does the audit committee appoint a CFO. "The CFO has to work with the CEO and others in the management. There's no point in having a dysfunctional team. The audit committee cannot be the panacea for all ills. Then in the world nothing would have gone wrong," said a Delhi-based auditor.

Rahul Roy, partner, Batliboi & Co, the audit arm of Ernst & Young, says that in many good companies the audit committee interacts with CFOs when he's appointed. The audit committee has been made powerful, and vested with authority. "It's like carrot-and-stick. If they don't function, you can hold them responsible," said Roy.

But auditors have welcomed the proposal whereby companies could early-adopt the IFRS, the new international accounting standards, before April 2011. KPMG's Jamil Khatri believes this will provide momentum to the convergence, as many companies are likely to adopt it as early as by March 2010 or June 2010. The experience of the early-adopters could help others make the transition.

But many think the proposed changes in legislation are incremental and in response to the Satyam scandal. "It's just a waste of time. Every time you have a scandal, the regulators jump in, and formulate laws. This is not the way to amend laws," said a Delhi-based auditor, who didn't wish to be quoted.

Auditors point out that some of the changes proposed by Sebi are already embodied in the Companies Act or other regulations. The Institute of Chartered Accountants in India, for instance, mandates rotation of audit partners every seven years. The Sebi panel has also suggested that listed firms must present audited balance sheets every six months against the current practice of doing it once a year.

"A more frequent disclosure of the asset-liability position of companies would assist shareholders in assessing the financial health of the companies, thereby helping them in making informed investment decisions," the panel said in a discussion paper on the Sebi website. "You have six-monthly audits, quarterly reviews, full-year audits and tax audits. We are getting into the situation of too many audits," said an auditor.

The panel is also in favour of reducing the time available for companies to file their audited financial results from 60 days to 45 days for each of the first three quarters of a fiscal year. Auditors say a majority of the companies declare their quarterly results within a month and pushing the deadline by another 15 days won't make a difference.

Seshagiri Rao, Joint MD & Group CFO, JSW Steel, feels the changes mooted won't make a big difference to companies. "Some of them are compliance issues which you need to fulfil as per the listing agreement with the stock exchanges."

The scope of the audit committee is (already) very wide, and covers a wide range of area, he said. "Even today, the appointment of the internal auditor is done by the audit committee."