Life is set to get tougher for auditors and audit firms, with the draft rules of theCompanies Act proposing to not just make auditors, but even audit firms, liable for frauds. So far, chartered accountants were penalized but the new law also puts firms under the spotlight. 

In addition, the draft rules have proposed that in case of conviction, auditors will not only have to refund the remuneration received by them but also pay damages to authorities as well as individuals, who have been affected by incorrect or misleading statements in audit reports. The tighter rules for auditors, including rotation, are the result of the alleged lapses seen during the Satyam scandal.  

As a result, the Companies Act has mandated rotation of auditors. The government in the draft rules has proposed that the existing audit assignments, which were taken up before the law was enacted, should also be counted, while calculating the maximum five-year term that has been prescribed. The so-called incoming auditor will not be eligible if he has been associated with the outgoing one by virtue of being part of the same network or is operating under the same brand.

Large firms such as Pricewaterhouse, KPMG, EY or Deloitte have several firms that are part of the network and the safeguard is meant to prevent any potential use of a loophole. The draft rules have also proposed that where the company has two or more persons as joint auditors, it will have to follow the rotation policy in such a way that all the joint auditors do not complete the term in the same year. 

Amid criticism over the way the Institute of Chartered Accountants of India has often dealt with complaints against CAs, the government has also set up the National Financial Reporting Authority under the new law. Apart from specifying standards, the new agency has been given powers to investigate, inspect books and even impose penalty, including debarring an auditor or a firm from practice for at least six months. (Times of India)