Proxy Advisory Firms Raise Red Flag Over Auditor Appointments

Proxy advisory firms, which provide investors with independent opinion on corporate governance issues, have warned shareholders against companies that have not changed their auditors since many years. They want shareholders to vote against resolutions seeking re-appointment of auditors if the same entity has been associated with the company for more than 3-4 years.

According to Institutional Investor Advisory Services India (IIAS), the coming week would see big listed entities like Tata Motors, Tech Mahindra, Emami, Adani Enterprises and Cadila Healthcare seeking shareholders approval for re-appointment of auditors that have already spent many years with the company.

In the case of Tata Motors, Deloitte Haskins & Sells have been the company’s statutory auditors since the last seven years and the same audit partner has been signing the accounts for the last three years, according to IIAS, which feels that to maintain independence, auditors must be rotated after six years, and the signing partner must be changed every three years.

Similarly, the auditors of Emami and Cadila Healthcare have been with the companies for seven years and 10 years, respectively. In these two instances, even the signing partners have not changed during the entire tenure, says IIAS.

IIAS and other proxy advisory firms like Stakeholders Empowerment Services (SES) feel that it is necessary to rotate auditors to maintain their independence and to avoid any Satyam-like instances in future.

“There is a possibility of cosy relationship developing between the management and auditors, if the same person continues as auditor for an unduly long period. It is better to avoid this possibility,” says MS Sahoo, advisor, SES, and a former whole time member of Sebi.

Incidentally, the IIAS observations come close on the heels of that of SES, which is headed by former executive director of Sebi, J N Gupta. SES advised shareholders to vote against the resolution seeking re-appointment of auditors in Godrej Consumer Products and Cummins India.

While Kalyaniwalla & Mistry has been Godrej Consumer's auditor since its listing 11 years ago, Cummins India has Price Waterhouse as its audit firm for the last 12 years.

SES cites Clause III(c) of The Corporate Governance Voluntary Guidelines, published by the ministry of corporate affairs (MCA), in 2009 to put forth its case. It states that a company may rotate the audit firm once in every five years and the audit partner once in every three years.

Industry players, however, say that while the motive is noble, there are practical issues in implementing a rotation policy, such as shortage of big-sized audit firms that can cater to the all the listed companies.

“For rotation to be successful, we need a big enough pool of auditors that is missing here,” says N Raja Sujith, corporate partner, Majmudar & Partners. “Instead, policies should be framed to strengthen the internal audit committee and make it more accountable,” he adds. Interestingly, the Sebi committee on disclosures and accounting standards (SCODA) had suggested in 2009 that the regulator could mandate that the “partner of the audit firm signing the audited accounts of a listed entity be mandatorily rotated every five years.” The regulator, however, has not taken any decision in this regard.

Financial Express, New Delhi, 03-08-2012