Govt not to exempt unlisted companies from auditor rotation

Time period for the rotation not to be increased

The ministry of corporate affairs (MCA) has ruled out exempting unlisted companies or those that have not raised any money from the markets from the auditor-rotation rule made compulsory in the Companies Act of 2013.

“We do not have any plans to exempt these companies from this provision,” said an MCA official who did not wish to be named. According to the new Companies Act, the companies shall not appoint an auditor for more than five years. Similarly, the auditor firm shall not be hired for more than two consecutive periods — each of up to five years.

“This provision was introduced to break the monopoly of the big four audit companies — KPMG, E&Y, Price WaterhouseCoopers and Deloitte,” said a prominent chartered accountant. Also, taking cues from the Satyam scam, the government feared an auditor would lose objectivity if he worked with a company for a long time.

NEW COMPANIES ACT

• The firms shall not appoint an auditor for more than 5 years
   
• Auditor firm shall not be hired for more than 2 consecutive periods — each of up to 5 years
   
• It caps the number of firms an auditor can audit in a financial year at 20 is not going to be diluted
   
• Govt has decided not to increase the time period of 5 years for an auditor and 10 years for an audit firm

Private firms, unlisted ones or those that have not raised funding from the public have not been excluded from this provision. Company professionals, though, say this provision for private firms does not make much sense. “They (such companies) have no minority shareholders to be taken care of,” said Jamil Khatri, global head of accounting advisory services, KPMG.

Private firms in general were very small, he added. So, professionals feared this would add to unnecessary compliance costs for companies. Besides, the new Act provision caps the number of companies an auditor can audit in a financial year at 20 is not going to be diluted.

The government has also decided not to increase the time period of five years for an auditor and 10 years for an audit firm. “This time period of 10 years is very little, as it takes two-three years for an auditor to only understand the operations, risks and controls of a company,” said Khatri.