Auditing and governing are two separate functions. But, these are not mutually exclusive. Neither are they independent, nor interdependent. Rather, one reinforces the other. For a company to have a good corporate governance practice, one of the important conditions is to have a voluntary rotation clause for auditors.
However this essential requirement 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. Large companies like Reliance Industries Ltd (RIL), Hindalco Industries, Larsen & Toubro (L&T), Grasim Industries and Jaiprakash Associates have not changed their auditors for more than 20 years.
Companies say long relationships help in familiarising statutory auditors with their systems and processes and, in turn, make the audit process faster, more consistent and efficient. Corporate governance experts and advocacy groups say this practice has created a class of so-called vintage auditors and warn that it may dilute the independence required of auditors. If a company has had the same auditor for long, then knowingly or unknowingly, a comfort zone develops. Rotating the (audit) firm or at least the signing partner brings in some independence.
However, with the passage of the new Companies Bill, this long association between a company and its auditors is set to change. The draft Companies Bill, which is likely to be passed in the ongoing Parliament session, has taken a middle path as it advocates rotation after five years with the flexibility to extend it to 10 years, after which there is a mandatory cooling off period for five years.