MUMBAI:Institutional Investor Advisory Services India Limited (IiAS), India’s leading proxy advisory firm, in a report on Wednesday said audit committees in Indian companies must evaluate their existing auditors for their audit quality and independence, and establish criteria for selecting new auditors.
Indian companies are required to choose a new auditor by March end as part of audit rotation. The companies are required to form audit committees in their companies to choose the new auditor.
“Audit quality is difficult to assess in its absolute terms, but there are indicators that can reduce the subjectivity involved in evaluating audit quality,” the report said.
According to a study by PRIME Database, audit related changes were made in 152 listed companies (out of 1,520 NSE-listed companies) from FY16 to FY17.
The audit rotation exercise in India is billed as the biggest of its kind in the world that will ultimately impact thousands of companies, including some of India’s blue-chip companies. The Big Four would not scramble after every one of these businesses — they are simply interested in the accounts of the Who’s Who of India Inc.
The big four—Deloitte, PwC, EY and KPMG– operates through a web of affiliate audit firms in India. The churn of clients seeking audits will be unprecedented. In the very first year, an estimated 750-800 company audits will rotate between the four firms and by 2020, the number will spike up to 2,500, according to experts.
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In BSE 500 about 62% of the companies are audited by smaller firms and 38% by the big four. Experts say that this could change as the big four could increase their market share.
IiAS has come out with a detailed framework of how to assess the audit quality of the auditors. Some of the matrices for that are:
Workforce metrics: These set of indicators enable the audit committee to judge the knowledge and experience levels of the audit firm personnel.
Training: These metrics can be used to check the efforts undertaken by the audit firm towards skill-development and training of its audit team.
Quality: These indicators highlight the quality of audit process and instances of audit deficiencies.
Trends in audit metrics: These metrics may help the audit committee understand if fees and time involvement have grown in proportion to the complexity and volume of audit work.
Legal: These indicators highlight the instances of litigation and penalties imposed by regulatory bodies on the audit firm.
Independence: These indicators can be used to evaluate the independence of the audit team and steps taken by the audit firm in ensuring that the independence policy is not violated.
Technology: These metrics indicate how well the audit firm understands the technology being used by the audit client, and leverages technology and analytics in audit execution.