File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Analyzing the Auditor and Audit Committee's Independence in India

This essay reviews the regulations and governance reforms carried out in India with respect to auditor and audit committee independence. The essay concludes by suggesting some governance reforms that may be considered to further strengthen auditor independence and the functioning of audit committees in India.

Auditors are the lead actors in the auditing process and provide independent oversight to the financial reporting by companies. Modern day corporations are huge and their operations are complex. While accounting standards and norms are specified by the regulators for proper disclosure. Yet preparation of proper financial reports requires an evaluation of the judgements and assumptions made by the management, along with their justification of the final choice among several alternative accounting principles.

Consistency of applications in preparing accounts and coverage of all relevant financial aspects are required. Auditors scrutinize and verify the accounts, as well as certify that the financial statements are prepared in accordance to the prescribed principles and that the accounts are free from material misstatements. It is therefore expected for the law in all countries to have put enormous responsibility on the auditors to ensure that the accounts give a true and fair view of the operations of the company.

The rules and regulations  regarding auditors' independence framed by regulators are predicated on some fundamental principles. The NCC lists two fundamental principles behind auditor's independence namely, independence of mind which permits arriving at an informed and reasoned opinion without being affected by factors that compromise integrity, professional skepticism and objectivity of judgement and independence in appearance which requires avoiding facts, circumstances and instances where, an informed third party could reasonably conclude that integrity, objectivity and professionalism has, or may have, been compromised.

The Three Key Aspects Of Auditor's Independence Which All Regulations Try To Address Are:
  1. A potential conflicts of interest that arise from employment, financial interest, and other relationships between the auditing firm and the audit client
  2. Types of nonaudit services rendered by the auditing firm
  3. Audit partner rotation

The NCC has deliberated extensively on these three aspects and come up with recommendations which are in line with the international best practices.

Given the enormous importance of auditors in ensuring the integrity of the financial reporting process, the law gives adequate powers to the auditors to help them discharge their functions effectively and the same time requires that auditors follow prescribed auditing standards and take responsibility of their actions. Section 126 of the Companies Bill, 2009 gives the auditors the right to access to all information relevant for the audit from any place intimidating the case of a holding company, Section 126 gives the auditors the power to access the records of all its subsidiaries that it deems necessary for preparing consolidated accounts.

The last provision is particularly important given the presence of business groups which have listed companies with multiple subsidiaries and for which proper consolidated accounts are required to judge the financial health of the companies.

A review of the sequence of regulations shows that there has been a steady dilution of the impendence requirement with respect to the audit committee. The original Clause 49 regulations required the audit committee to have minimum size of three and to be constituted entirely of nonexecutive directors with majority of them being independent.[1]

The only effect of the revised Clause 49 regulations was that management directors could now be part of the audit committee. The Companies Bill, 2009 follows the revised Clause 49 regulations by not insisting that the audit committee comprise only of nonexecutive directors but reverts to the majority rule form the twothirds rule.[2]

The lower independence requirement regarding the composition of the audit committee has to be seen in context of the fact that the audit committee's recommendations relating to hiring, oversight, compensation, and firing of the outside auditor are not binding on the Board. While Clause 49 is silent on this matter, Section 158 (9) of the Companies Bill (2009) (and currently under Section 292A of the Companies (Amendment) Act, 2000) states if the Board does not accept the recommendations of the audit committee, reasons therefore should be communicated to shareholders

In conclusion, adequate, relevant and highquality disclosures are one of the most powerful tools available in the hands of independent directors, shareholders, regulators and outside investors to monitor the performance of a company. This is particularly important for emerging economies like India where there is insider dominance. To this extent, measures that strengthen auditor independence and enhance the powers, functions, and the independence of the audit committee will be crucial in the governance of Indian companies.

Governance risk is a key determinant of market pricing of listed securities. A high perceived 'independence quotient' of a company's auditing process can be reassuring to outside shareholders that can help reduce the risk premium of raising capital thereby providing a strong business case for strengthening auditor and audit committee independence.

  • Petty R, Cuganesan S (2006). "Auditor rotation: Framing the debate." Australian Accountant, 66, 40-41.
  • Sarkar J, Sarkar S (2009). "Multiple board appointments and firm performance in emerging economies: Evidence from India." Pacific Basin Finance Journal, 17, 271-293.
  • Huang HW, Mishra S, Raghunandan K (2007). "Types of nonaudit fees and financial reporting quality." Auditing, 26(1), 133-145.
  1. Securities and Exchange Board of India (SEBI), Clause 49 Regulations, Circular No. SMDRP/POLICY/CIR10/2000, dated February 21, 2000.
  2. Securities and Exchange Board of India (SEBI), Clause 49 Regulations, Circular No. SEBI/CFD/DIL/CG/1/2004/12/10 October 29, 2004.

Award Winning Article Is Written By: Mr.Ayush Patidar
Awarded certificate of Excellence
Authentication No: MY414130070647-20-0524

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly