Signing audit partners may be required to take a mandatory one year cooling-off period before they can take up non executive director (NED) or Managing Director (MD) or Wholetime Director (WTD) in the same company audited by them.
This norm has been recommended by the Company Law Committee (CLC) which submitted its third report to the government recently.
This recommendation has been made to uphold the independence of auditors and the one-year cooling off period should kick in from the date of cessation of office as an auditor. Also, the one year cooling off period should also apply for positions of NED or MD or WTD in the holding company or subsidiary companies or associate companies of the auditee company, according to CLC.
Currently, there is restriction on auditors from holding an independent directorship. The Companies Act, 2013, currently contains no provision prohibiting an auditor from becoming a NED or MD or WTD in the same company or group of companies, a company law expert pointed out.
Conflict of interest
The CLC was keen that auditors — to serve their role with utmost professional integrity — need to be free from all economic, financial and other inducements that tie them to the company. It is towards this end that the cooling off period recommendation has been made, sources said.
Given auditors’ critical role, their independence is a pre condition to good corporate governance. Pertinently, a conflict of interest may arise where the auditor could potentially benefit from a financial interest in an audit client, particularly by way of future employment in the same company, the CLC had noted.