Market regulator SEBI or Comptroller & Auditor General of India should appoint statutory auditors in listed companies to promote and ensure independence of auditors, suggested Amarjit Chopra, a former President of the CA Institute.

“For listed companies, we should not allow the promoters to decide as is the case now. SEBI or CAG will be better placed to decide the auditors for companies, particularly listed and those above a specific turnover threshold,” Chopra told BusinessLine .

A discussion on the issue has been triggered by a statement made by Corporate Affairs Ministry Secretary Injeti Srinivas who underscored the need for a “new mechanism” to protect the independence of statutory auditors in listed companies.

Srinivas had flagged this point during his address at the recent Foundation Day event of the CA Institute. He had highlighted the auditor appointment system in state-oriented enterprises (CAG selects the auditors) and how it had worked well for the country.

Currently, statutory auditor appointment in listed companies are governed by the Companies Act provisions that provides that shareholders will appoint statutory auditors in general meetings. However, the prevailing norm on the ground is that the promoters of the listed companies play huge influential role in deciding the statutory auditor and such choice is usually approved by shareholders without any objections.

Srinivas said for a CA to do justice to his or her work, it is absolutely essential that they are independent. “The whole crux of the debate is independence — how does a chartered accountant be independent from the person who engages them, from a person who pays their fees… that is the issue,” he said.

“It’s unfortunate that everybody wants to only target auditors for the high profile corporate failures. Nobody wants to look at the real issue. The main issue is corporate governance and who appoints auditors,” Chopra said.

Experts contend that auditor independence is not protected till the time the promoters have an influential role in deciding the appointment and the pay. Ashok Haldia, former Secretary of the CA Institute, said the audit is carried out in public interest. “Therefore, severance of nuptial cord between management and auditor, in form as well as in substance, is key to restoration of public trust in audit,” Haldia said.

Public trust

For this, appointment of the auditors and fixing their remuneration have to be totally and effectively made independent of the management, he said.

“Any measure short of this like the one introduced through the Companies Act 2013 routing the appointment of auditor through the audit committee or restrictions on non-audit services provided by the auditor or requiring auditors for separation of audit and non-audit services through the notion of Chinese wall would fall short in ensuring quality audit,” according to Haldia. It is universally recognised that quality technical standards, tools and techniques are effective only if auditors remain independent and objective to be able to challenge management decisions, he said.

In the case of public sector banks, the Central Statutory auditors are appointed by the management. As for the audit of bank branches, the list of audit firms are screened by the Reserve Bank of India and then sent to banks. Some banks have now started using a CA Institute approved software application to assign the branch audit work for various CA firms.

As for central public sector enterprises, the CAG currently empanels the list of CA firms and makes the appointment.

Chopra felt that the earlier adopted ‘committee’ approach should be restored for deciding on the central statutory auditors of PSBs.

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