The offices for the accounting firm KPMG stand in Los Angeles. Photographer: Patrick T. Fallon/Bloomberg

List Of Services That An Auditor Can’t Provide Must Be Expanded: Committee Report

Financial fraud, trust deficit due to auditors’ failure to act as gatekeepers and lack of accountability have prompted a shift towards independent oversight of the audit profession.

A three-member committee set up by the government in April pointed this out in its report that has examined regulatory issues relating to multinational accounting firms. The government had set up the committee on the Supreme Court’s directions to examine if the existing legal framework is equipped to regulate the audit and accounting professions.

Here are the key observations and recommendations of the committee:

Audit Profession: Oversight

  • India’s decision to set up the National Financial Regulatory Authority can address self-regulation of the audit profession.
  • NFRA rules, which are being formulated by the government, must give the authority powers to publish audit inspection results. Fear of loss of reputation can be an effective deterrence for audit firms to build better internal checks and balances.

Indian Network Firms: Control

The committee concluded that the term multinational accounting firm is a misnomer. It pointed out that merely being part of a network and sharing global costs don't make Indian network firms multinational accounting firms as they're neither owned nor controlled by the international network or entity. These are Indian firms registered with the Institute of Chartered Accountants of India with partners who are the institute’s members.

  • There is an impression that Indian audit firms that are affiliated with these networks—Ernst & Young Global Ltd., PricewaterhouseCoopers International, Deloitte Touche Tohmatsu Ltd., KPMG International Cooperative—may be governed or controlled from outside India.
  • Supervision and control of internal processes of network firms is aimed at maintaining consistent standards in audit quality globally within a network.
  • This cannot be equated with ownership or control for the purposes of corporate law.
  • Branding with international networks would increase competitiveness of the Indian audit firms.
  • Indian network members should be allowed to use the brand name of their respective network.

Non-Audit Services To Audit Clients

To address the issue of conflict of interest when an auditor provides non-audit services to the client, its subsidiary or holding company, the committee has made several suggestions. They include:

  • Capping non-audit fee to a maximum of 50 percent of the statutory audit fee earned from the listed auditee company or its holding or subsidiary company in a financial year.
  • Disclosing audit and non-audit fees earned by the network from the company that it audits, its holding or subsidiary companies to the NFRA.
  • The Companies Act, 2013, lays down several services that an auditor cannot provide to an audit client, its subsidiary or holding company. The committee has proposed that the following services be added to that—taxation, valuation and restructuring services.
  • The audit committee or board approval to provide non-audit services must be disclosed in the annual report of the auditee client, its holding company or subsidiary companies.

Audit Firm, Network Firm: Liability

  • NFRA should be empowered to impose a penalty on the international network with whom the Indian entity has a networking relationship with. This is to used where there's a conclusion of fraud or an audit failure attributable to a faulty methodology being followed in the network.
  • Amount of penalty to be imposed on the international network shall be up to five times the amount of penalty imposed on the audit firm.