Soon after the Rajya Sabha passed the new Companies Bill, corporate affairs ministerSachin Pilot hogged the limelight by asserting that the basic intent of the new law was lesser regulation, more compliance and to ignite the entrepreneurial spirit by offering "freedom" to entrepreneurs.

What's ironical is that the government has conveniently forgotten the role of auditors, even when it tom-toms that the new Act seeks to ensure better enforcement of accounting laws in the corporate world.

Aglance at various provisions of the new legislation makes it clear that the days of the auditing firms are numbered and soon the auditors will be an extinct breed.

Clause 140 confers the right to the proposed National Company Law Tribunal to order a change of auditors in case it finds the auditors have acted fraudulently or abetted or colluded in any fraud by the company or in relation to the company.

Additionally, the clause specifies the responsible audit firm will be banned from fresh appointment as auditors for any company for a period of five years from the date of order given by the tribunal.

Clause 245 introduces the concept of class action that gives the right to members and depositors of a company to claim damages or compensation from the company, its directors, auditors and experts.

Such damages can be claimed from auditors for any improper or misleading statement of particulars made in the report or for any fraudulent, unlawful or wrongful act or conduct. The unlimited liability under class action will be on the firm and the partners involved.

If we take a cue from the multimillion-dollar class-action settlements across the globe, the collateral costs and compensation could be so exorbitant that it could easily make the audit firm and its partners bankrupt. If this provision is implemented, a majority of audit firms will have to shutter down their practice. This will, in turn, hugely polarise auditing in favour of large firms that have the money power to shoulder such a burden.

But considering the limit on the number of audits per partner, the question remains: who will do the balance auditing? Further, this clause runs counter to the concept of limited liability partnership as it tends to create unlimited liability.

There are various monetary penalties ranging, from Rs 25,000 to Rs 25,00,000, which have been introduced in the Act for non compliances related to filing, reporting, fulfilment of powers and duties, etc, by the auditors.

Further, the Act lays down provision for imprisonment, if an auditor is found to be guilty of fraud, which ranges from six months to 10 years.

Referring to the current low-fee structure, the average fee per listed company is lower than Rs 10,00,000 now. If private companies are counted for the same, the average fee per company is even lower at around Rs 5,00,000.

Considering the onerous liabilities cast on auditors vis-a-vis their fees, the audit firms will be prevented from taking up the audits. The Bill also stipulates the constitution of the National Financial Reporting Authority (NFRA) that will oversee the quality of service of professionals associated with compliance of accounting and auditing standards.

Currently, the audit firms are subject to peer review by the Institute of Chartered Accountants of India (ICAI), review of audited financial statements by the Financial Reporting Review Board (established by ICAI) and review of audit firms under the aegis of Quality Review Board (established by government of India under Chartered Accountants Act, 1949).

The constitution of NFRA will create an additional review burden on the firms. Again, the overdose of regulation will only deter firms from taking up auditing. The law that claims to usher in quality seems to be putting a high price on it. More importantly, any hope of enforcement of new provisions by the government will be illusory.

In the early 1980s, total composition of CAs was 80% in practice and 20% employed. However, over the last decade, 90% of CAs are employed and just 10% are in practice. The provisions of the new Act will further dissuade CAs from joining the practice and push them to scout for risk-free jobs. Now, the moot query is: who will audit the companies? The CAG? (Economic Times)