Audit panel calls for tighter norms, more independents

The Naresh Chandra Committee on Corporate Audit and Governance, appointed by the government to enhance corporate reporting and accountability, has recommended far reaching measures designed to alter the way India Inc. works.
The committee has said there is no need for any statutory rotation of audit firms to improve the quality or integrity of the financial statements of corporate entities, a sticking point with the auditing community.
The committee in its report submitted to finance and company affairs minister Jaswant Singh today felt that compulsory rotation of audit partner every five years would suffice.
It has also called for greater role for independent directors on the board of companies — they will be at least 50% of the board and 100% of all audit committees.
This applies to companies with a paid up capital and free reserves of Rs 10 crore or turnover of Rs 50 crore.
Other suggestions made by the committee pertain to increasing the levels of disclosures made by a company and its auditors as well as overhauling the disciplinary mechanism for audit and related professionals.
The committee has also listed services it felt the auditors to a company should not be providing to the same company. The committee has also endorsed the finance minister''s proposal to set up a Serious Frauds Office in the Department of Company Affairs.
Briefing media shortly after submitting the report, Mr Chandra said that there was no conclusive evidence of proofs from rotation of audit firms while there was sufficient evidence of the risks.
"In line with the Sarbanes-Oxley Act (of the US), the Committee is in favour of the compulsory rotation of audit partners," the reports said. Incidentally, only Comptroller and Auditor General and Assocham were in favour of compulsory rotation of audit firms, Mr Chandra said.
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The report goes on to say that at least 50% of the engagement team, besides the partners, responsible for the audit of a listed company or companies whose paid-up capital and free reserves exceeds Rs 10 crore or turnover exceeds Rs 50 crore, should be rotated every five years. It added that persons compulsorily rotated could return after a break of three years.
The committee has sought to define "independent directors" in terms more precise than in clause 49 of the Listing Agreement of the stock exchanges.
The committee has also felt corporate governance can be improved only if disclosures are increased.
It wants the auditors report to give the shareholders and investors a clear idea of all contingent liabilities. It said that management should provide clear description of each material liability and its risks, which should be followed by auditors clearly worded comments on the management''s view.
The committee also has it that qualifications to accounts must be adequately highlighted in the auditors'' report and that the audit firm may read out the qualifications, with explanations to the shareholders at the company''s AGM.
The report has further recommended that the audit firm should separately send a copy of the qualified report to the Registrar of Companies, the Securities and Exchange Board of India, and in the case of listed companies, to principal stock exchanges, and that a copy of this letter be sent to the management of the company.
On supervising and improving the quality of work of the auditors, the committee has proposed setting up of quality review boards while rejecting a proposal of setting up a body on the lines of Public Accounting Oversight Board under the Sarbanes-Oxley Act.
The committee has said three independent QRBs could be up for Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Indian Cost and Works Accountants of India.