Joint-audit proposal: A spanner in the ledger?

the nuts and bolts of the proposal: Instead of the traditional process of engaging only one firm to conduct an audit for a company, a joint audit involves more than one auditor. The aim is better investigation, compliance and hence better business performance. In simple terms, it means that two groups of people vouch for the authenticity of the information in two different parts of the financial statement.

The Companies Act of 2013 does not make joint audit mandatory for private companies. A quick glance reveals that it was public sector companies and lenders that made the transition to joint audit, later in 2021 the Reserve Bank of India (RBI) made it mandatory for financial institutions whose balance sheets were larger than this. 15,000 crores.

ground reality: Undoubtedly the intention of the government is good, but the facts and ground reality present a different picture. In countries where joint audits have been conducted, neither a significant impact nor any perceptible difference in corporate governance has been reported.

While some financial experts argue that the purpose of a joint audit is to enhance competitiveness and quality, that they bring greater transparency and can expand a company’s capabilities, the fact remains that joint audits are very rare and largely European. have been rejected by the federal and other courts. US, UK, Indonesia, European Union, China, Brazil, Russia, South Korea and Turkey.

It is also expensive. According to estimates in France, the joint-audit approach results in 20% additional costs compared to the single-auditor approach. This includes ancillary costs, such as an additional workforce at the customer’s end and coordination.

A 2019 report titled Shared and Joint Auditing: Are Two Auditors Better Than One? The Institute of Chartered Accountants in England and Wales states, “If joint audit reforms were introduced, government and audit regulators would need to consider support for challenger firms and listed companies. Or joint audits would also need to establish a process for monitoring whether competition and choice have indeed increased over time and whether there has been a positive impact on audit quality.”

Challenges and Downsides,

• Joint audits require both auditors to agree on a group audit opinion, and the audit report can be very long, running into many pages covering all observations and issues. This would require a high degree of co-operation between the two auditing firms.

• In some cases, there is always the danger of one audit firm being more dominant than the other, leaving the latter with less bite. This can upset the balance of power and lead to disagreements.

• As part of quality control, each audit firm reviews the other’s work in a joint audit scenario. This evaluation and review is done on the basis of the parameters of each individual firm. When there is no meeting point, it is an understood fact that results can vary – leading to wastage of time, effort and finance.

• Joint audits are an additional cost to the companies and their balance sheets.

• If a joint audit must be conducted, then, as is typical in traditional scenarios, audit firms will need to rely on internal auditors for standard protocols and operating procedures. But this is a double-edged sword, given that it is well understood that internal auditors—those under internal control—are the weak wickets in the line-up, and giving the OK to them or their process can be risky. , if there are some serious issues that the auditing firms may have overlooked because they assumed there would be no messing with standard procedures. To rule out this possibility entirely, a loophole-free framework should be created in the joint-audit proposal, as it is today. Otherwise, the idea itself is impractical.

The other big conflict is that two different firms handling specialized and different parts of an audit may not really work well over time. Instead of account reconciliation, industry experts believe that it can create differences and hence more headache for companies, as it is possible for important and critical elements that require auditing and thus Through kind setting requires a professional review. This can compromise audit quality and complicate corporate problems, rather than creating the seamless process envisaged by the joint-audit proposal.

There is also a big question mark on ease of doing business if the joint audit proposal is passed. The real solution to having a more efficient, time-saving and professional system is to ensure that internal financial controls are strengthened and sharpened. Perhaps this should be taken into account by the government; Data quality efforts can then be aligned to this.

To conclude, there is an important and urgent need for the government to review the joint-audit proposal. In the present circumstances, it seems that the very purpose it was created to serve is being defeated.

These are the personal views of the author.

Arun Malhotra is the founder and CIO of Capgro Capital Advisors