In order to reduce the risks of excessive familiarity and bring in much-needed transparency into the auditing process, the Companies Act 2013 (‘2013 Act’) provides for Mandatory Firm Rotation (MFR) for all the listed and certain classes of unlisted companies such that audit firms completing a term of 10 years or more need to be rotated beginning 1 April 2017.
Grant Thornton in India in association with Prime Database conducted a joint survey to assess India Inc.’s readiness to meet the requirement of Mandatory Firm Rotation and the perceived impact of this important legislation. The results of the survey indicate that 82 percent of the respondents are yet to start planning or only have an informal plan agreed with the Board of Directors to meet the requirement of Mandatory Firm Rotation and only 18 percent have either appointed auditors or have a comprehensive plan in place agreed with Board of Directors/Audit Committee to comply with MFR.
Commenting on the results of the survey, Vishesh C Chandiok, National Managing Partner, Grant Thornton India LLP said, “The survey results clearly show the need for a majority of India Inc. to start planning their approach towards Audit Firm rotation early, and not to underestimate the complexity and importance of this generational shift in regulations.
I certainly hope the Indian profession and India Inc. implements MFR in substance, so that the objective behind this major reform is fully realized and the future of audit in India is bright. Otherwise, the value placed by external stakeholders on an audit will continue to be questioned, which cannot be in anyone’s long- term interest.”
Despite the fact that India Inc. is not completely ready for the transition, the survey results show that awhopping 78 percent clearly believe that MFR is a step in the right direction to enhance objectivity leading to improved financial reporting. Also, auditor independence is a fundamental pre-requisite for India Inc. while changing the auditor and the survey findings indicate that 73 percent of the companies have either already taken steps to comply with the independence requirements of the 2013 Act or are in the process of such compliance. This shows that Corporate India is well aware of the guidelines to change auditors and is trying to fulfil the same.
When asked about their plans to comply with the MFR requirement and changing the auditor, 64 percent of the respondents suggest that they plan to run full Request for Proposal (RFP) process and 21 percent plan to swap internal auditors with existing auditors. As far as the preference for the new auditor is concerned, 58 percent surveyed companies prefer the large firms with international presence while others were keen to have large Indian firms/others as auditors. Furthermore, 52 percent of the respondents believe there will be an increase in audit fees in the range of up to 25 percent.
“MFR is a step in the right direction and will surely result in greater transparency, higher accountability and better corporate governance” said Pranav Haldea, Managing Director, PRIME Database Group.
As India Inc. is embracing another regulatory change with the implementation of Ind AS, 52 percent of the respondents favour to comply with MFR requirements earlier as it would ease the adoption of Ind AS. Also, Indian businesses believe that compliance with MFR at group level will lead to a smoother transition with 84 percent vouching for the same. Of this, 58 percent of the companies believe that complying MFR requirement at group level would lead to smoother transition regardless of the applicability of the MFR rules to individual entities, whereas 26 percent of the respondents believe that compliance with MFR at group level may lead to a smoother transition only if planned well.