Center will amend the Companies Act, will soon tighten the audit system

The Ministry of Corporate Affairs will soon take stringent steps to tighten the framework of statutory auditors with a view to ensuring their independence.

The measures are aimed at checking recurrence of situations like the 2018 failure of Infrastructure Leasing and Financial Services Ltd (IL&FS) group firms.

The ministry has completed consultations on a report on audit reforms submitted by an expert committee to Finance and Corporate Affairs Minister Nirmala Sitharaman in March. Drafting of a bill to amend the Companies Act will now begin, a person familiar with the discussions in the government said, reflecting the government’s resolve to extend the moratorium on statutory audit.

Audit reforms will now become a priority for the ministry as reforms in other areas have reached an advanced stage – a bill on amendments to the Competition Act has already been introduced in Parliament and work on bankruptcy reforms is at an advanced stage.

The ministry has received feedback in favor of strengthening the audit framework, said the person cited above, who spoke on condition of anonymity. An email sent to the spokesperson of the Ministry of Corporate Affairs on Friday did not elicit any response at the time of publication.

One of the proposals is to tighten the audit framework by preventing statutory auditors from performing non-audit services to their audit clients, who are listed companies, large companies and public interest entities such as insurance or banking companies. There may be some relaxation in the case of non-public interest entities.

The proposals also include mandatory disclosure of past relationships with audit clients to auditors in audit reports, mandatory joint audits in certain classes of companies and mandatory impact analysis of any adverse comments or qualifications in audit reports.

The proposed bill is also expected to stipulate a one-year cooling-off period for auditors before they hold senior positions in the company or one of its affiliates. Also, auditors must detail the circumstances of leaving the audit assignment, such as non-cooperation, fraud or serious non-compliance from the company.

The proposed amendments to the Companies Act are also expected to include measures aimed at improving ease of doing business.

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