Auditor rotation gathering steam

Companies Bill in India requires mandatory auditor rotation

A lot has been written about auditor rotation over recent months, but in August, India became the latest major economy to actually enforce mandatory rotation. This is big news. And not just for us accountants.

So what does the Companies Bill in India require? And what are other countries doing?

The Indian Bill replaces the 50-year old Companies Act and requires that listed companies rotate their external audit firm at least every 10 years. Boards of these companies must also be made up of one-third independent directors and must include at least one woman. It will transform India’s corporate governance and thousands of listed companies will need to change their audit relationships.

I hope this will encourage other governments around the world to look at their corporate oversight systems. And there is certainly some movement around the world.

In 2011, the European Commission proposed mandatory rotation every six years – although  this looks set to become 15 years – and appears to favour limits on the non-audit work that a listed company’s auditor could do.

In the UK, the Competition Commission has shied away from mandatory rotation but FTSE 350 companies could be obliged to put their audit contract out to tender at least once every five years. In the US, a proposal by the Public Company Accounting Oversight Board to force listed companies to change auditors periodically was voted down by the House of Representatives last month by a massive 321 to 62.

One thing is clear: investors want to see changes in auditor-company relationships. As auditors, we must embrace these changes.

Higher levels of transparency and investor protection are good for business and society.