Statutory auditors may not get large companies’ non-audit operations

The government is looking to ban statutory auditors from taking up non-audit work on “public interest” companies — which means those that are listed or are above a certain threshold — and their subsidiaries.

Besides, it is exploring the possibility of joint audit for certain companies as part of the amendments to the Companies Act, for which a Bill is planned to be introduced during the Budget session of Parliament that reconvenes next month, sources told TOI.

The ministry of corporate affairs (MCA), which will pilot the Bill, is currently engaged in consultations and is yet to decide the final details of the legislation, which will also need inter-ministerial discussion and a go-ahead from the Union Cabinet.

While both the issues — joint audit and ban on non-audit work by audit firms — have been discussed in the past, the government has been reluctant to legislate on the issue principally due to opposition from chartered accountants, a powerful interest group.

The move will come as a setback for not just the Big Four firms, including Deloitte, EY, KPMG and PricewaterhouseCoopers, that operate through a network of firms, but also for some of the large Indian players. Sources indicated that the plan is to restrict it to “public interest”: Companies will be modelled on the lines of the regime under the National Financial Reporting Agency (NFRA), which supervises the functioning of 6,820 companies and their auditors and audit firms. On Friday, the agency said that all listed companies, as well as unlisted companies with paid-up capital of over Rs 500 crore, or turnover of over Rs 1,000 crore or with debt and deposits of Rs 500 crore or more are under its ambit. In addition, insurance companies, banks, power generation and distribution companies and those governed by special laws are monitored by NFRA.

The fresh discussions around the ban on non-audit work follows the experience with several entities that have faced a crisis in recent years, including IL&FS, and some of the troubled banks and nonbanking finance companies, where the role of auditors has come under scrutiny.

Similarly, on the issue of joint audit, MCA had almost dropped the plan after a report by a committee under former finance secretary Ashok Chawla, but has re-opened the issue, despite protests from industry chambers and other interest groups that fear that the cost will rise significantly.

If RBI’s experience in dealing with tighter regulations for auditors is anything to go by, the government will face a volley of protest. Last year, the RBI had mandated a three year term for auditors, a mandatory cooling off and checks on non-audit activities for banks, finance companies and mortgage players.