Phase-wise implementation of norms will ensure better compliance, suggests industry chamber
A significant policy measure such as this should not be applied retrospectively and a reasonable transition period for better understanding, planning and compliance is needed, the industry chamber said in a representation to the central bank. It is an established protocol to provide a transitional time to implement such provisions.
A bolt from the blue
It maybe recalled that the RBI had, on April 27, issued guidelines for the appointment of statutory auditors of commercial banks (excluding RRBs), urban co-operative banks and NBFCs (including Housing Finance Companies). These norms, which have prescribed a set of selection criteria for audit firms based on quality parameters and independence considerations, has come as bolt from the blue for both the audit fraternity as well as corporate India.
Given that a number of elements are being implemented for the first time, the CII has suggested that these norms be applied through phase-wise implementation; be aligned with the requirements of the Company Law; and allow a reasonable transition period of around two years.
A cool-off period of one year before the appointment (of auditors) for their independence is not practical to implement, the chamber has said. Also, the concept of joint audits should not be mandatory.
The CII also suggested that the requirements related to reduction in the tenure of audit engagement, cap on number of audits and extended cooling of periods, may not specifically address any perceived concerns on audit quality. These are inconsistent with the provisions in the Companies Act, 2013, and are not comparable with the international practices and regulations prescribed by the IESBA, PCAOB, SEC, which are widely accepted and adopted globally. Implementing these requirements is likely to create avoidable complications without any appreciable enhancement to audit quality and governance. Further, the lack of harmony among various regulations on this subject, is likely to add to complexity and confusion in the sector and also impact ease of doing business.
Hardship to companies
The reduction in the tenure of audit, cap on number of audits by an audit firm, and extending the applicability of the provisions to NBFCs will make it mandatory for a large number of banks and NBFCs to immediately change their auditors, including requirements of joint audits in certain cases, based on monetary thresholds. The challenge to identitying an appropriate firm is further accentuated by the supply-side constraints, which are likely to be caused due to stricter eligibility criteria and independence considerations, including association with group (including those using the same brand) on providing unrestricted non-audit services, and that too in the past 1 year.
All these amendments will create inconsistent policies vis a vis the Companies Act, 2013 without adding any qualitative parameters.
It is all the more challenging in present times, severely impacted by Covid-19, to implement these requirements without any transitional provisions, the CII has said.