In last couple of years, the audit profession has received the attention which no other profession has received due to corporate frauds which has surfaced, the kind of economic and regulatory changes taken place (which has not taken place for couple of decades). We have witness complete overhauling of Companies Act, Ind AS and Auditing Standards being aligned to the International Framework, Income Computation and Disclosure standards and Corporate Governance requirements to enhance more transparency. In such environment, the risk and challenges of audit profession has increased manifold.
The auditors (specifically the statutory auditors) are expected to be updated with all the changes, understand the complex business environment, understand the technology used for maintenance of books and unearth all the frauds in the organization. It may not be possible for a sole proprietor and audit firm (excluding the large firms) to have knowledge / experience to conduct audit in such turbulent environment and comply with the frequent changes of the entire regulatory requirement.
Joint Audit could be one of the means that create an audit regime that can better address the risk faced by the auditor in this fast changing business environment. Industry expertise and domain expert of the auditors can be effectively utilized if joint auditors are appointed. The practice of appointing more than one auditor to conduct the audit of large entities thereby sharing the risk and responsibilities of the audit is termed as Joint Audit.
Internationally, the concept of joint audit is used in United States, Denmark (from 1930 to 2004), Germany, Switzerland and United Kingdom, France. In France, the joint audit became legal requirement in 1966, while in South Africa, a joint audit is mandatory for firms operating in the financial services sector. In United States, a joint audit is performed by the Internal Revenue Service by using various specialists and agents simultaneously in a single tax audit. [1]The State of Maryland has a Joint Audit Committee, composed of members of the State House of Representatives and State Senate, responsible for reviewing the legislative audit.[2] A recent report produced by Consultants London Economics for the European Commission highlighted that (considering the case study of France and Denmark) joint audit results in least concentration of audit markets in Europe. In the Green Paper Audit Policy : Lessons from Crisis of the European Commission, which is aimed in stimulating discussion regarding improvement in audit regulation and to increase the quality of audit, has suggested Joint Audit to be one of the means to enhance the audit independence and to stimulate the healthy competition in the audit market.
In 2016, Indian firms had requested for mandatory joint audits to the Expert Committee on Audit Firms (The Govt. had established an expert group to review concerns raised by Indian Accounting firms) to address the restrictive conditions imposed by foreign investors in the appointment of auditors. However, the committee rejected this request. [3]
Companies Act 2013, gives liberty to the members of the company to choose joint auditors to get the audit of the company. (S.139 (3) of Companies Act, 2013). Thus, the joint audit is not being made mandatory by the Companies Act. Presently, joint auditors in India are generally found in State-owned enterprises by the regulator or the office of the Comptroller and Auditor General of India or banks or insurance company for that matter. On 10th January, 2018 the Union Cabinet approved a number of amendments in Foreign Direct Investment (FDI) policy. The intent was to simply and liberalize FDI policy for ease of doing business in India resulting in larger FDI inflows contributing to the growth of investment, income and employment. The Press release further indicated that wherever the foreign investor wishes to specify a particular auditor / audit firm having international network, then the audit of such investee company should be carried out as joint audit wherein one of the auditors should not be part of the same network. The Department of Industrial Policy and Promotion (DIPP) – The Central Government arm which formulates policy decisions, released Press Note No. 1 (2018 series) on 23rd January 2018 to crystallize the terms of the cabinet press release. The condition for appointment of joint audit was made applicable to all investee companies with direct or indirect FDI, regardless of their sector of activities. Also, the onus of compliance of this condition lies on the Indian Investee company.
The responsibilities of joint auditor may vary depending on the nature of assignment. For example, with respect to the audit of Internal Financial Control over Financial Reporting or compliance of any particular law can be taken up by one of the joint auditors who have expertise knowledge in that particular area. The method in which the joint audit has to be conducted is addressed in auditing standard SA – 299 Joint Audit of Financial Statements. Audit planning, risk assessment and Allocation of work shall be done jointly by the Joint Auditors. Communication becomes an important factor in case of joint audit. The division of work between the joint auditors needs to be done mutually between the auditors which may be in terms of identifiable units or specified areas.
Thus, documentation of allocation of work is very important between the auditors in avoiding any dispute or confusion between the auditors and well as the entity which is being audited.
Joint audit would help many small and medium sized firms to build up capacity and pick up work of large corporate. Further, it endorses a multi-layer audit market / scope wherein the audit firms having expertise in certain areas can be incentivized by sharing joint responsibilities. Para 13 of SA 299 specifically addresses that each joint auditor shall be responsible only for the work allotted to the firm including the proper execution and the audit procedure adopted. The companies Act 2013 prescribes rotation of auditor, with the appointment of joint auditor, it could be a helping hand to the new auditor to understand the system and practices of the organization before the past auditor completely rotates out post the transition period. The company can appoint auditors in such a manner that both the auditors does not complete their terms in the same year. It would also be beneficial to the organization as it would ensure some sort of continuity with the previous auditor and ensure that audit rotation is done without complete loss of familiarity / knowledge about the company.
Audit of large multinational companies which is spread across the geographical areas having multiple business lines can be handled by small or medium sized firm through joint audit where each auditor can contribute their expertize knowledge.
In case any fraud risk is reported / unearthed by one of the joint auditor, it can be provided to the joint auditor to evaluate similar risk factors in the scope of work provided to him. Joint audit would ensure that all the areas have been comprehensively covered.
References:
[1] Internal Revenue Service – Joint Audit Planning; September 17, 2003
[2] Maryland General Assembly Joint Audit Committee April 7, 2007.
[3] The dominance of Big four auditors & India’s prescription of Joint Audits, ETCFO March 26,2018.
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