Stricter audit norms with bigger scope on the cards

Govt plans to revise the Company Auditors Regulation Order 2016 to expand scope of audits and improve scrutiny

Auditors might soon have to provide a detailed report on usage of borrowed funds, comment on critical financial ratios, and flag off any factors that affect the going concern nature of the companies under audit, as the Centre plans to expand the scope of audits and improve scrutiny of firm’s financials. The Ministry of Corporate Affairs is planning to revise the Company Auditors Regulation Order 2016.

RU CHI K AC HIT RA VANS HI writes

Auditors might soon have to provide a detailed report on usage of borrowed funds, comment on critical financial ratios, and flag any factors that affect the going concern nature of the companies under audit, as the government plans to expand the scope of audits and improve scrutiny of financials, a senior official said.

The Ministry of Corporate Affairs is planning to revise the Company Auditors Regulation Order (CARO) 2016, announcing several additions to the rulebook for auditors early next year.

“The subject involves multiple jurisdictions. We should be able to introduce the revised order by January after consulting other regulators,” the official said.

The requirement to audit the usage of borrowed funds was dropped in 2016 from CARO due to lack of clarity. The government, through the revised CARO, wants auditors to provide a “fund to fund” audit to ascertain how money given as loans by one company to the other such as its own subsidiaries or related parties is being utilised.

“The idea is to restrict the transfer of such funds as the funds are being given to a company, which was not eligible to get a loan on its own... also such transfers are made at a much lower interest rates. All this affects the financial health of a company,” said Pavan Vijay, founder of Corporate Professionals.

The move will also keep in check the practice where a company borrows funds for working capital but uses it for a different purpose since such loans are easily available, experts said.

Auditors are also likely to be asked to comment on critical financial ratios such as debt to equity. Experts said, to make an informed comment on the matter, a detailed format would have to be introduced, which would throw better light on the company’s debt situation. “Companies currently provide a total loan figure instead of a bank wise break-up which can be misleading and lead to underreporting of company’s total debt exposure,” an industry expert said.

With increasing expectations from auditors to highlight frauds, he said this could bring more clarity as these figures are conclusive evidence and would leave little scope for manipulation of books.

Also, with rising instances of company insolvency and bankruptcy coming to light, government is likely to ask auditors to comment on anything that might affect the going concern nature of the company in their reports.

“As auditors we would like to provide exhaustive information...a mere opinion on the financial statements may not meet the requirements of all stakeholders. Extended reporting through CARO could address that need,” a senior executive of an audit company said.

The ministry is in consultation with regulators such as Sebi, Reserve Bank of India, Pension Fund Regulatory and Development Authority, Institute of Chartered Accountants of India to finalise the revisions to CARO.

The proposed changes, according to experts, will bridge the expectation gap that exists between auditors and those who use their reports, including bankers.

The revisions will also put greater onus on companies to provide detailed information to auditors. This has been one of the major reasons for a spate of resignations of auditors who want to de-risk themselves from companies whose accounting practices may be questionable.

“While this is true, once it is clearly stated what an auditor has to comment on, he will have to qualify any such hurdles in the scope limitation of audit... The purpose is to provide auditors assertion of specific points on state of compliances,” a senior auditor said.

While auditors are not responsible for every compliance, it has been their defence that they have stuck to the objectives of the audit, he said.

Will all the extra work hike the audit fees? “It should, although the audit fees are not very high now. Most audit companies use auditing as a stepping stone to provide a whole host of other services to their clients which is where they make money,” said a senior industry executive.