Sucheta Dalal :Rotate Audit Partners or Audit Firms?
Sucheta Dalal

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Rotate Audit Partners or Audit Firms?  

October 8, 2009

Long after the Satyam scandal, the Securities and Exchange Board of India (SEBI) has put out a set of recommendations made by its Committee on Disclosures and Accounting Standards to tighten disclosures by listed companies. One of the Committee’s suggestions is that the partners of audit firms must be rotated every five years. Change of auditors is an issue that has been debated for decades without progress because powerful audit firms and very senior professionals have invariably managed to lobby and quash any action in this direction. But, as SK Patel, a Mumbai-based chartered accountant, has written to SEBI, “This is mere eyewash.” He points out that Gujarat-based companies, such as Gujarat Narmada Valley Fertilizers Company and Gujarat State Fertilizers Company, rotate auditors every three years as a matter of good governance, even when it is not legally mandated. And, if the idea is to detect the cooking of books, then five years is too long a term for an auditor who is incompetent or in cahoots with management. 


Mr Patel also makes the interesting point that the Satyam fraud remained undetected even though Price Waterhouse (PWC) partners had, in fact, changed and Subramani Gopalakrishnan had been replaced by Srinivas Talluri. He points out that, when something is wrong, a new partner signing the balance sheet is hardly going to expose the former. In fact, he will help cover it up. Moreover, rotation of auditors every three years is already mandatory in the banking and insurance sector as well as for public sector undertakings (PSUs).


So, tinkering with the rules is of no use if SEBI and the bourses are unwilling to act. We have already pointed out how stock exchanges mechanically posted a notice from Prithvi Information Solutions regarding its plan to change the auditors, without any question. Moneylife found out that the company’s auditors changed every couple of years and PWC had walked out in less than eight months without signing the accounts, forcing the company to appoint another auditor through an extraordinary general meeting. There is no indication that SEBI or the bourses have followed up the issue even after our revelations. Further, as Moneylife has repeatedly argued, there is no effort to mandate disclosures to a statutory reporting system (like its defunct EDIFAR) or initiate even a random check for the veracity of disclosures. SEBI has yet to realise that tinkering with regulation without appropriate corrective action does not lead to investor protection.


-- Sucheta Dalal