New Companies Act shortly: Focus on Auditing

CA Ayush Agarwal (Kolkata-Pune-Mumbai) (27186 Points)

28 September 2010  

 

We are likely to get new Companies Act shortly. Indications are there that the wait is almost over. The Standing Committee on Finance has already submitted its report and the Ministry of Corporate Affairs is working hard to finalise the newCompanies Act. The proposed amendments covering accounts and audit of companies will have far reaching effects.

 

National Advisory Committee onAccounting Standards (NACAS) will be renamed as National Advisory Committee on Accountingand Auditing Standards (NACAAS). Auditing standards will also come under the purview of NACAS. The Standing Committee has recommended NACAAS should be given sufficient mandate not only to set and oversee auditing and accountingstandards, but also to monitor the quality of audit undertaken across thecorporate sector. NACAAS will be entrusted to develop and prepare a comprehensive list of audit firms over a period of three years, after which it will be mandatory for any company to appoint an auditor from this list. It should be manned by professionals. Its role may be expanded depending upon experience gained.

 

If, the new Companies Act incorporates the recommendations of the Standing Committee, NACAAS will assume the stature of the oversight body. This is a welcome move. It should not be viewed as an adverse reflection on the regulation of the auditing profession by the Institute of Chartered Accountants of India (ICAI). The track record of the performance of ICAI, within the limitations of the present system, to maintain the audit quality is quite good. Audit failures, which are aberrations, should not be quoted to as examples of overall regulatory failures.

 

But, the creation of an effective independent body to oversee audit quality will definitely enhance the confidence of stakeholders in the auditing system. However, the role of ICAI should not be undermined after setting up the new oversight body. The quality of audit cannot be improved solely by monitoring the auditors and their performance. The quality also depends on the ability of the profession to update its body of knowledge and to maintain a high standard of professional certification programmes, and on the effectiveness of the continuing education programmes. It is a huge responsibility on ICAI. Moreover, the ICAI will continue to be the ultimate authority to issue accounting and auditing standards for use by entities other than companies. Let us hope that the new NACAAS will hold the present culture of working in close coordination with ICAI.

 

The new Companies Act will make internal audit mandatory. The internal auditor shall be either a Chartered Accountant or a Cost Accountant. The Voluntary Code of Corporate Governance issued by the Ministry of Corporate Affairs in the year 2009 stipulates that the internal auditor should not be an employee of the company. Reading together the above two provisions, it may be concluded that in coming years, the practice of outsourcing of internal audit function will gain momentum.

The proposed amendment requires that the internal auditor will conduct internalaudit of books of accounts of the company. Internal audit, as is understood today, is not limited to internal audit of books of accounts. Internal audit coversaudit of operations, audit of internal and external information system, audit of risk management system and also audit of management decisions. Therefore, internal audit is a multi-disciplinary function. Internal auditor is expected to work as an internal consultant to the company. Internal audit has gone out of the exclusive domain of professional accountants.

 

It is a specialised service, often headed by a professional accountant. The proposed amendment might result in companies appointing an accountant for theaudit of books and accounts and another specialised internal audit firm to cover other aspects of internal audit. This may not be desirable. Another fall out may be that the auditor, while reporting under CARO, about the adequacy and effectiveness of internal audit will examine the effectiveness of internal audit of books of accounts. Perhaps, we are not looking for these outcomes. The Ministry of Corporate Affairs should carefully draft the particular clause to avoid any dilution of the reporting under CARO and the narrowing down the scope of internal audit.





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