The voluntary rotation clause for auditors that is seen as one of the essential requirements for good corporate governance is not followed that seriously by large-cap companies in India.
A recent study conducted by Institutional Investors Advisory Services (IIAS), a voting advisory firm shows that nearly 56% of the Sensex companies and 40% of the Nifty 50 companies have retained the same auditor for more than ten years. This is quite high if one goes by the voluntary code issued by the ministry of corporate affairs (MCA) that prescribes an auditor rotation every five years.
The large companies like Reliance Industries, Hindalco, L&T, Grasim Industries and Jaiprakash Associates have not changed their auditors for more than 20 years.
The broader market companies that include PSUs seem to have done much better in complying with the MCA’s voluntary norms. The analysis of 286 listed companies done by the firm reveals that for only 25% of the firms the association with same auditor has stretched for more than ten years.
The firm believes that public sector units (PSUs) and mostly the PSU banks have been more compliant with the code, as well as the draft bill, when compared to their peers in the private sector. “This is attributed to the fact that the auditors for most PSUs are appointed in consultation with the Comptroller and Auditor General of India (CAG). Since the MCA guidelines are non-binding in nature, most private sector companies disregard them,” said the firm in its release.
In the last 15 years, while the median tenure of auditors in the private sector has ranged around 7 years, for PSUs it has been far lower at 3 years. Also the average remuneration that PSUs have paid to auditors at `33 lakh has been less than half of what private companies have paid (Rs 76 lakh).
Advocates of corporate governance feel rotation is mandatory as vintage auditors tend to develop a certain level of comfort with the company management, thereby compromising the integrity of the audit process. Rotation pre-empts this, it is felt.