PSU firms beat private sector in auditor rotation

Audit fees also lower as process directly monitored by CAG

Public sector firms are better in complying with the best practices in appointment and remuneration of statutory auditors than their private sector counterparts. Auditor tenures in PSUs are shorter and their fees much lower, according to a study published by Institutional investors Advisory Services (IIAS), a proxy advisory firm.

Corporate governance experts believe that vintage auditors tend to develop a certain level of comfort with the company management, thereby compromising the integrity of the audit process. They feel that mandatory rotation will not only bring a fresh perspective on the financials, it will also keep the current auditors on their toes as they will be aware that a new auditor may detect any irregularities in the accounting process.

 

It is based on this rationale, the new companies bill has provided for mandatory rotation of auditors.

“ Public sector units (PSUs) are found to be more compliant with the code, as well as the draft (Companies) bill, when compared to their peers in the private sector. This is attributed to the fact that the auditors for most PSUs are appointed in consultation with the Comptroller and Auditor General of India (CAG),” IIAS said.

According to the report, in the last 15 years, while the median tenure of auditors in the private sector has ranged around 7 years, for PSUs it has been far lower at 3 years. In the case of banks, the auditors are appointed in consultation with the Reserve Bank of India (RBI) which ensures frequent rotation of auditors (every four years).

Not only the tenure, private sector pays more too. Data for 160 companies for 2011-12 shows that 22 PSU companies paid their auditors median fees of Rs.3,300,000. In the private sector (138 companies) the median remuneration was Rs 7,600,000. “Given this gap, it is probably time for private companies to issue a request for proposal (RFP) for the audit engagement – this will lend credibility to the audit committee,” the advisory firm said.

Of the top 286 listed firms analysed by IIAS, 55 per cent had one of the Big 4 accountants as their statutory auditor. This is up from 44 percent in 1997. Of these, Deloitte and E&Y held the largest market shares followed by PWC and KPMG respectively.

According to IIAS, the dominance of the Big 4 may be a result of their stature in the global auditing industry and the consequent level of comfort they provide to shareholders, particularly institutional investors and FIIs. 

“Our analysis shows that all of these audit firms have an average tenure close to 10 years, which is more than the MCA threshold of 5 years. This is a worrisome trend,” It added.

Audit committees can play a proactive role here. “In case an extension is provided beyond the initial five year limit, IIAS expects the chairman of the audit committee to clearly explain the reasons for the reappointment to the shareholders. Further, replacing one audit firm with another from the same ‘audit network’ should not qualify as rotation.”

IIAS also expects that the date of the new companies bill will not become the date from which the auditor tenure will be counted, but the date of original appointment will be used.