In a bid to strengthen the financial reporting framework, Section 139 of the Companies Act 2013 has mandated rotation of individual auditors every five years and of the audit firm after a maximum period of ten years (after two terms of five years each) in listed companies1. A cooling-off period of five years after the stipulated threshold is required to be considered eligible for re-appointment. Section 139 is applicable with retrospective effect - which means the existing term of the current auditors will be taken into account for computing the overall tenure.

The Act has provided a transition window: instead of making immediate changes, companies with vintage auditors (tenure of >10 years) can comply with the rotation requirement anytime within three years from the date of commencement of the Act (1 April 2014).

IiAS’ analysis shows that 25 of the CNX Nifty 50 companies (17 of the BSE S&P Sensex companies) have auditors where the tenure of the audit firm/network has exceeded 10 years (refer Annexure A). However, only two of these companies have rotated their auditors in the current proxy season. The rest have sought refuge in the 3-year transition window.

Periodic rotation of auditors is an accepted governance practice. Under the Banking Regulations Act 1949, banks must change their auditors every four years. The Companies Act 2013 – including the provisions of Section 139 – has been in the works for a while. This gave companies sufficient room to plan a transition. Therefore, IiAS has been recommending that shareholders vote AGAINST the reappointment of vintage auditors, despite the window-period afforded by the Companies Act 2013. IiAS believes good corporate governance practices transcend regulatory requirements: companies should have proactively rotated their auditors rather than wait for regulations to compel them to do so.

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