Audit Quality and Unregistered Individual Auditors in India

Audit quality is determined by an auditor’s ability to discover breaches of accounting
standards. Audit quality is a product of auditor competence and independence. However, in India, as the Auditor rotation becomes reality, many companies covered under section 139(2) are opting for the individual auditors.Section 139 (2) of the Companies Act, 2013, requires following companies to rotate the  Auditors

  • A listed company or
  • All unlisted public companies having paid up share capital of Rs. 10 crore or more;
  • All private limited companies having paid up share capital of Rs. 50 crore or more;
  • All companies having paid up share capital of below threshold limit mentioned in ii and iii above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more
    Shall not appoint or re-appoint
    a. an individual as auditor for more than one term of 5 consecutive years; and
    b. an audit firm as auditor for more than two terms of 5 consecutive years

This clearly indicates that the above mentioned companies can not offer the incentives to the Audit firms and get the audit completed in the favorable manner. There is a tedious task involved in the appointment of the auditors every five years. However, there is a silver lining to this dark cloud. As the firms become aware of the

What is Individual Auditor ?

Individual Auditor is a member of Institute of Chartered Accountants of India, who has opted for the Certificate of Practice but is not associated with any Partnership and Sole Proprietary firm. This category of the auditors are the least regulated category of the Auditors who don’t belong to the audit firms nor do they incorporate a sole proprietary concern. Though, there is no specific provision in Companies Act to disqualify the individuals from Signing of the financial statements of the company, the bias of the regulators is visible towards the registered firms while they empanel the auditors for the BRanch Statutory Audits.

Reserve Bank of India considers Sole Proprietary concern (a firm registered with ICAI as Individual) with certain riders for the audit of the Public Sector Banks but the regulator have made no specific provisions for the Individual Chartered Accountant with no ICAI registration to participate in the allocation of the Branch Statutory Audits of the Public Sector Banks.

Ministry of Company Affairs on the other hand provides the room for application of the Individual as the Auditors in the ADT-1 Form which is typically filed by the company to intimate the government about the appointment of the Auditor.

Why is the bias against Individual Auditors ?

Auditors need to perform a variety of tasks to form an overall assurance or attestation
opinion. To do so, various personal attributes of the auditor (e.g., skills and personality)
influence the outcome. Thus, it seems likely that individual characteristics of the auditor could affect the quality of the audit being undertaken. Although individual auditors may influence audit outcomes with their personal characteristics, they are constrained by the quality control mechanisms within the audit firm. In fact, audit firms try to maintain consistency in audit quality through control mechanisms, including standardization of work procedures, centralized control of risk and materiality decisions, and socialization.

Why Do the companies Chose Individual Auditors ?

International Research studies reveal that there are multiple reasons why the companies are appointing the Individuals as their auditors. This section reveals the reasons associated with the chosing of the auditors

Fee Savings

Since there are no costs associated with the organisation and infrastructure, individual auditor offers the services at highly cost effective prices. However, stakeholders should note that it is impossible for one person to complete the audit work beyond certain volume alone. Hence, fee savings may be the reason provided by the audit client for appointing individual, intelligent reason could be to limit the scope and get the financial statements approved.

Exercising Influence

One of the most popular reasons for chosing the individual as the auditor is that it is easier to influence a single person than a firm of audit which evidence certain procedures to maintain the audit quality.

Rotation becomes easier

When the companies are covered under the section 139 (2), appointment of the individual as the auditor is some what the guarantee of the transition of auditors. When the Individual is influenced and is restricted in the scope there is a very little chance that he can issue a qualified report.

Disguise the Number of Clients

When the Accounting Regulator compile the minimal data about the Individual, it is difficult to understand the exact nature and the number of the audits completed. This helps the individuals to easily violate the limit imposed on the auditors of 20 companies.

Disguising the Risk Associated 

It was noticed that there are many individuals who excercise influence on politicians, terrorists or other heightened risk individuals as some of them advise these individuals on tax planning and managing their investments or even family offices. Appointment of the Individual as auditors help the companies to connect the clients of the Individual without it being noticed by stakeholders.

Role of Accounting Regulator

Though their is a bias of the companies towards individuals as their auditors. It is essential to note that the Institute of Chartered Accountants of India have made their position clear about mentioning of the Firm Registration Number (Unique Number Allotted by ICAI to every Sole Properietary and Partnership or LLP)

Attention of the members is invited to the announcement regarding requirement relating to mentioning the firm registration number in the audit reports and resolution passed by the company for appointment of statutory auditors, published on page 1312 of the February 2010 issue of the Journal.The Council of the Institute of Chartered Accountants of India, in terms of the decision taken at the 296th meeting held in June 2010 has decided to extend the requirement to mention the firm registration number to all reports issued pursuant to any attestation engagement, including certificates, issued by the members as proprietor of/ partner in the said firm. The requirement shall apply where such firm registration number has been allotted by the Institute of Chartered Accountants of India.
The Council further decided to make this requirement effective for all attestation reports/ certificates issued on or after 1st October, 2010.

In the wake of different interpretations of different regulators about the Individual as Auditors, most of the stake holders prefer to have the Audit firm which is registered under the ICAI Act, which is the ultimate regulator for the Auditors in India.