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THE NARESH CHANDRA Committee on corporate governance has contended that there are no discernible benefits from a policy of audit rotation. But the body of academic research on which it has based its findings has not been properly spelt out. The panel has spoken in a very general way of studies at the University of Bocconi and by some individual researchers, without bothering to cite them properly. This is unfortunate as only with proper citation of research work is it possible for the investing public to understand the context of research; the methodological limitations if any in applying these findings to the Indian situation; the parameters of `benefits' considered, etc., that are so essential to a meaningful debate on a subject. Equally, it has erred in giving undue emphasis to the notion of `specialisation' implicit in allowing audit firms staying engaged with a client unhindered by regulatory restrictions.

True, continued involvement in the audit of a company does enable the auditor to gather increased specialised knowledge of the firm's operations. But to imply that a new entrant would be simply unequal to the task would be an insult to their professional competence. In any case, the argument, taken to its extreme would imply that virgin attempts at audit inherently fail to safeguard shareholder interests because of lack of in-depth knowledge of the auditor undertaking the assignment. Nothing could be more absurd than that. On the other hand, a policy of compulsory rotation does promote a greater degree of objectivity as it removes the incentive of continued engagement for an auditor to overlook questionable practices of the management. In fact, a case could even be made for taking away the right of appointment of auditors from the shareholders and entrusting it to an independent body on the lines of an authority such as the Comptroller and Auditor General which oversees empanelment and allotment of audit assignments for public enterprises. Anecdotal evidence shows that auditors of PSUs have generally toed an independent line where management interests are at stake, as generally they do not feel beholden to the management for their appointment. The only argument against such a proposition is that it takes away the right of the shareholders to decide the auditor.

But the modern view of corporations has expanded the notion of stakeholders to include lenders, suppliers, customers, employees and even the state. Also the notion that only the shareholders bear the risk of business failure runs counter to the reality of a huge sum of money of banks and financial institutions being locked up in non-performing assets. The fact is, when there is a business failure, the creditors' money is as much at risk as that of the shareholders. Yet, creditors have no say in the appointment of auditors. So, the notion of appointment of auditors being intrinsic to ownership rights cannot be sustained. Quality audit is at the root of effective governance. Any reform of corporate governance must necessarily involve an examination of existing systems of audit effectiveness.

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