A proprietary CA firm or an individual chartered accountant will no longer find it easy to retain the audit mandate in a company beyond the stipulated five consecutive years as allowed under the company law.
The CA Institute has made it clear that a proprietary firm (having a firm registration number) or an individual CA (practising either in his own or trade name) can be appointed auditor of a company only for one term (of five consecutive years). An individual, as a proprietor, cannot use his name, say ABC, as well as his trade name (ABC&Co), to retain the audit mandate for two consecutive audit rotation cycles of five years each.
No more than one term
Under the company law norms, a proprietary firm or an individual CA is not eligible to be appointed or reappointed auditor for more than one term of five consecutive years even if he were to use his trade name separately for the next term, according to the CA Institute.
“The objective is clear. This clarification has been given by us to avoid confusion and to keep the true spirit of auditor rotation. We do not want an individual CA or a partnership firm to flout the norms by using trade name or by bringing in another firm in the same network to retain the audit mandate beyond the stipulated time period,” Nihar Jambusariya, President, Institute of Chartered Accountants of India (ICAI), told BusinessLine.
If the same proprietary CA firm keeps on auditing the same company beyond the stipulated cycle of five consecutive years, then there is a possibility of an “acquaintance threat” emerging, which is not good for the independence of the auditor, he pointed out.
The company law stipulates that companies should not appoint an individual as an auditor for more than one term of five consecutive years. Similarly, no company can appoint an audit firm as an auditor for more than two terms of five consecutive years.
Even an audit firm operating or functioning under a network with same brand name cannot be replaced with any other CA partnership firm under the same network once the specified period of two terms of five consecutive years is completed, according to sources in the CA Institute.