With the implementation of new Companies Act from April 1, a majority of the top 200 listed companies will need to change their auditors over the next three years in a bid to ensure objectivity and prevent the "cozy management-auditor nexus". 

The recently notified section 139 of the Companies Act 2013 makes it mandatory for audit firms to be changed after every 10 years. The rule is applicable from April 1, 2014, on a retrospective basis (the existing term of the current auditors will be taken into account for computing the overall tenure) but provides a three-year window to comply with the provisions. Interestingly, large business groups like Reliance, the Tatas, Mahindra, InfosysBSE 1.06 %, L&T and a few MNCs like MarutiBSE 0.78 %, ColgateBSE 1.61 % and P&G have vintage auditors and will soon need to initiate the transition. 

An analysis done by shareholder proxy firm IiAS, shared exclusively with TOI, shows that over half of the 221 companies have auditors whose tenure has exceeded 10 years. Another 24 companies have auditors who have been auditing the accounts for at least seven years. Given that the Act provides a three-year window to comply with the provisions, these 137 companies will need to replace their existing auditors by 2017-18. 

Globally, auditor rotation continues to be a subject of much debate, as regulators and policy makers around the world examine lessons from the financial crisis in order to improve and strengthen the quality of financial reporting and prevent frauds. But while critics continue to oppose the move, a broader consensus seems to be emerging on the importance of auditor rotation in ensuring audit independence and objectivity. Capping the overall tenure forces auditors to pay closer attention to details and be more sceptical in their audit approach. 

India is now one of the few markets where even unlisted and private companies (above a certain threshold) need to rotate their auditors. This is welcome as it strengthens the entire financial reporting framework, an analyst from the shareholder proxy firm said. 

However, Russell Parera, partner, Price Waterhouse, feels, "International studies have shown that rotation increases audit risks in the early years of change. In India, rotation of auditors in unlisted companies is beyond what is contemplated in most other jurisdictions, and will present significant challenges for companies and auditors with the the timeframe." 

In India, the auditing industry is fragmented and comprises a large number of small- to medium-sized audit firms, while at the top end the industry is still characterized as an oligopoly, primarily due to the dominance of the Big 4 - Deloitte, PwC, Ernst & Young and KPMG. In India, these firms operate through their respective audit networks which comprise local partner firms. 

In 2012-13, 57% of the S&P BSE 200 and CNX 200 companies were audited by the Big 4. Deloitte has the largest presence, followed by E&Y. 

IiAS expects listed companies, especially those in the S&P BSE 200 and CNX 200, to take the lead and start complying with the spirit of the regulations. This will enhance the integrity of the audit process and go a long way in improving investor perception about the accuracy and quality of financial reporting, it says. (Economic Times)