Govt not to change '20 companies per auditor' rule

The provision is seen against ease of doing business, especially amid a paucity of good CAs

The corporate affairs ministry has ruled out changing a Companies Act provision prohibiting an auditor from handling the books of more than 20 companies in a year. This provision would not be changed, said an official.

The new Companies Act says a person shall not be eligible to be the auditor of a company if such “person or partner is, at the date of such appointment or reappointment, holding appointment as auditor of more than 20 companies”. 

This provision was introduced to break the monopoly of a few big audit companies and distribute work more evenly among chartered accountants. Industry organisations have been asking the ministry to increase the limit, to enhance ease of doing business. The earlier limit was 30.

Jamil Khatri, global head of accounting advisory services, KPMG, said there was no need to change the limit from 30 to 20 in the new Act. “There is already a dearth of good chartered accountants,” he said.

Also, since there is no exemption in the Act for unlisted companies or one-person companies in the Act, the ones that are the worst hit are the small or mid-level audit firms that get most of their work from unlisted companies.

The government in July put a draft notification in Parliament, giving certain exemptions for small companies. According to the notification, “one-person companies, small companies and private companies with paid-up share capital of less than Rs 100 crore” will not be considered for this limit. But the small and mid-level companies will get the benefit only after the draft notification has been duly notified by the corporate affairs ministry.

The audit firms, which usually take contracts from public companies (listed and those that have raised debt from the markets), are more worried. 

Most individual public companies have numerous subsidiaries. Since each subsidiary is considered a separate company, the number of auditors assigned to a public company has to be increased. For example, in the case of a public company with 200 subsidiaries, a big government company earlier had to assign not more than seven auditors, as the limit per auditor was 30 companies. But now, the audit firm has to assign 10 auditors, as the limit is 20 companies.

Also, the earlier limit of 30, devised by The Institute of Chartered Accountants (ICAI), was liberally applied. So, in case an audit firm had 10 of 20 partners for audit, it could audit 600 (20x30) companies. Now, with the new law, the same company cannot audit more than 200 (10x20) companies.

“We used to calculate the limit per firm, now we have to calculate the limit per auditor; this is highly restraining,” said an auditor from one of India’s biggest accounting firms.

Amendments to the new Companies Act are being discussed in the current session of Parliament.