iThe first stanza of Verse 47 of Chapter 2 of the Bhagavad Gita translates to: “You have a right to perform your prescribed duties, but you are not entitled to the fruits of your actions.”

On many an occasion, regulators in India seem to follow this diktat in letter and spirit while making regulations. The Ministry of Corporate Affairs (MCA) is proposing amendments to the Companies Act that focuses on the work done by auditors — as always, this is on the basis of a committee report. One of the proposals being thought of is to mandate joint audits for a certain class of companies — a concept that has not proved to be effective in improving audit quality anywhere in the world.

Another proposal is to tighten the audit framework by disallowing statutory auditors from performing non-audit services to their audit clients which are public interest entities such as listed companies, large companies and insurance/banking companies. There could be some relaxation in the case of non-public interest entities.

The proposals also include auditors’ mandatory disclosure in the audit report of previous relationship with the audit client, compulsory joint audits in certain classes of companies and compulsory impact analysis of any adverse remark or qualification in the audit report.

Many stipulations

The proposed Bill is also expected to stipulate a cooling-off period of a year for auditors before they take up senior positions in the company they audited or in any of its associates. Also, auditors will have to explain in detail the circumstances of quitting an audit assignment such as non-cooperation from the company, fraud or severe non-compliance.

Reports state that these proposals are being made with an intention to prevent IL&FS-type accounting and auditing accidents. If this is true, there is an issue with the intention itself. When Satyam and Sahara happened, we thought they were one-off events. When IL&FS happened, we thought it was an outlier (in a negative way).

The fact is that accounting and auditing mishaps will happen once in a few years — this is one of the occupational hazards of unbridled capitalism. Instead of reacting to the incidents, regulators need to respond to them. Invariably, the response should be to penalise the errant and let go of the compliant.

The ostensible reason given for mandating joint audits is that two pairs of eyes are better than one. India has had experience with joint audits for banks and some public sector companies. It would not be wrong if one concludes that audit quality in these sectors has not improved just because of joint audits.

A parallel to the concept of joint audits would be the proposal to segregate the duties of the chairman and the managing director for companies. Here again, there has been no perceptible improvement in corporate governance. Compliance with this proposal has been so poor that the Securities and Exchange Board of India (SEBI) has shelved it for the time being.

There is also an inherent issue in the way joint audits are done. The joint auditors are assigned different areas of the audit but issue a joint audit report — a tacit acceptance that they take responsibility for the audit jointly. In some joint audits, one firm calls all the shots while the other only participates in the audit — audit quality remains status-quo-ante.

It is possible that such template-based regulations are being made to make auditors be a bit more careful and state things as they are in their report. Even without these regulations, there are enough paras in the Auditors’ report for auditors to red-flag high-risk matters.

One of the reports that auditors need to give is on internal control over financial reporting being robust. In some instances, auditors have reported some internal control improvements as a Key Audit Matter but the IFC report is clean. Almost all accounting accidents can be traced to a weakness in internal control. Auditors can rely on the work done by internal auditors and review the standard operating procedures of the entity to give a clean chit to the existence of internal controls — auditing standards would need to be made watertight to minimise this.

While regulation is needed, over-regulations could prove counter-productive.

The writer is a chartered accountant