Draft rules of Companies law provide clarity on auditor rotation: Experts

NEW DELHI: The draft rules released today by the government for the new companies legislation provide clarifications on rotation of auditors but ambiguity persists on eligibility and appointment of internal auditors, say experts.

Government today issued the first tranche of draft rules, covering 16 chapters of the Companies Act, 2013, which overhauls regulations that govern corporates in the country.

"The rules provide many clarifications with respect to rotation of auditors.

"The five-year period for rotation in the case of an individual and ten-year period in the case of a firm will be calculated retrospectively and will include holding office as auditor prior to the commencement of the Act," Dolphy D'souza, National Leader and Partner in a member firm of Ernst & Young Global said.

"Auditor rotation rules have been prescribed but do not seem to consider size of companies based on turnover or any measure of Profit & Loss account but on basis of balance sheet items.

"The rules do not contain any relaxation from preparation of consolidated financial statements for intermediary holding companies," Deloitte India Chairman P R Ramesh said.

The first set covers rules governing new norms for the board of directors, auditors, registration and incorporation of companies, revival of sick companies, financial accounts of corporates, foreign incorporated companies and National Company Law Tribunal and Appellate Tribunal, among others.

"While the draft rules have settled the question with regard to the companies which would necessarily require an internal audit, ambiguity still persists on eligibility and appointment of internal auditors," PwC India's Risk Advisory Services Leader Satyavati Berera said.

As per the Act, the internal auditor can be a chartered accountant, cost accountant or other board nominated professional.

Meanwhile, D'Souza said there has been some breather in terms of reporting on fraud by auditors to the central government.

The reporting is required to be made within 30 days, but only with regards to material fraud.

"Materiality shall mean frauds that are happening frequently or frauds where the amount involved or likely to be involved is not less than 5 per cent of net profit or 2 per cent of turnover of the company for the preceding financial year," he noted.