| Devil’s advocate
New Delhi, May 13: The changes in the Companies Act will make it harder for companies to dump an auditor who raises a stink with sharp and unflattering comments about their accounting shenanigans.
The amendments, which have been proposed through a Bill recently introduced in Parliament, has provided a host of reasons for removing an auditor in order to prevent an unholy alliance between the auditor and the firm for whom he is doing the audit. To remove an auditor, a resolution has to be passed in the annual general meeting with a majority consensus.
The proposed legislation makes it mandatory to move a special resolution at the AGM to remove a difficult auditor and have it passed by at least twice the number of shareholders than those who resist the change. In other words, at least two-thirds of the shareholders present and voting have to approve the change.
R. Bupathy, president of the Institute of Chartered Accountants of India (ICAI), said, “It is a welcome move that makes it difficult for a section of the shareholders to change an auditor if they do not like the auditor.”
India Inc has seen several instances where companies have tried to change an auditor who did not toe their line.
The companies amendment Bill is based on the recommendations of the Naresh Chandra Committee on corporate governance and auditing practices and has an avowed objective of ushering in transparency in auditing and preventing any nexus between the management and the auditors.
In the section on disqualification of an auditor, the Bill adds to a list already present in the section 226 of the existing Act. The Bill states that a person shall not be qualified to be appointed as an auditor of a firm if he receives or proposes to receive more than 25 per cent of his total income in any fiscal as his remuneration from such a company. “This is to prevent over dependence on a client, which can lead to a professional compromise,” said Bupathy.
However, it shall not apply to auditors during the initial five years of the profession of an auditor or to those auditors whose total income is less than Rs 15 lakh in any financial year. “This is to protect the newcomers as they are more dependent on one client,” said Bupathy.
Other auditor disqualification clauses include not having any direct financial interest in the firm, not receiving any loan or guarantee from or on behalf of the firm, and not having any business relations with the firm. “Attachment of the auditors to the firm in any form is not desirable,” said Bupathy.