Joint Auditing In India: A Potential Solution For The Auditing Fraternity?

India's economic landscape is undergoing a dramatic transformation, presenting both exciting opportunities and new challenges.

Indian corporations are growing at an unprecedented pace and with increasingly complex structures across diverse industries and locations. This, along with rapid globalisation, has led to a heightened focus on international accounting standards and reporting practices for robust and reliable financial information, placing a heavy burden on the shoulders of auditors.

To ensure trust in the Indian economy, auditors must uphold the highest ethical standards and continuously develop their expertise in a rapidly evolving financial landscape.

Additionally, the traditional methods of auditing are rapidly evolving alongside technological advancements like artificial intelligence, big data analytics, cloud computing, etc., demanding a new breed of technologically savvy auditors.

From a governance perspective, the Ministry of Corporate Affairs has been instrumental in pushing for increased transparency and accountability in corporate governance through initiatives like the National Strategy for Financial Inclusion.

The confluence of these factors—complex corporate structures, technological advancements, and stricter government regulations—has created an increasingly challenging environment for auditors.

Traditional solo audits may struggle to keep pace with the growing demands, which is where the concept of joint audit emerges as a potential solution. A joint audit involves two or more independent audit firms collaborating to examine a company's financial statements, allowing auditors to leverage each other's expertise and resources, leading to a more comprehensive and robust audit.

Internationally, countries like France and South Africa have successfully implemented mandatory joint audits, particularly within the financial services sector.

In India, The Institute of Chartered Accountants of India provides guidance on joint audits through the Standard on Auditing (SA) 299 outlining the responsibilities and expectations of each participating firm, ensuring a smooth and effective collaboration.

While providing specific guidance on division of work among the auditors, it further elaborates on allowing each auditor involved in a joint audit to express his own opinion through a separate audit report if they are unable to arrive at an agreed joint report.

This gives significant freedom and rights to all the auditors, even while conducting a joint audit. While the Companies Act currently doesn't mandate joint audits, it is already mandatory for banking and insurance sector entities, and there is a growing consideration to make them compulsory for public interest entities other than banks and insurance companies.

A joint audit offers a win-win situation for all stakeholders involved in the auditing process, with a stronger audit team and better results. Collaboration by audit firms allows the pooling of specialised skills, independent objectivity and experience of each firm in handling large and complex audits in multiple areas, like financial instruments and internal controls.

Similarly, by working together, the diverse experiences are shared that help provide a varied angle of the given subject matter. The experience shows that the talent is not necessarily related to largeness of the firm but to the study and the experience of the person working on the project. Hence, working together is always an enriching experience for all, irrespective of the largeness of the firm.

This can mitigate the risk associated with a single auditor potentially missing some crucial aspects. Also, multiple firms with strong reputations can enhance the credibility of the entire audit report significantly, resulting in greater trust put in by the investors and other stakeholders in the auditing process.

Making joint audit mandatory for public interest entities other than banks and large companies can, in fact, act as a safeguard, ensuring robust financial reporting within critical sectors that have a significant impact on the economy.

Another positive aspect of encouraging joint audits would be giving a chance to deserving growing firms to participate in larger audits. No doubt, strict parameters of audit quality standards suggested by the ICAI's Audit Quality Maturity Model must be adhered to.

This will certainly help in growing the overall capabilities of the profession, providing the necessary opportunity to firms ready to invest in professional excellence. This can also positively result in raising the competitive instincts in the auditing world, with more and more firms enhancing the required skillsets with more opportunities.

This is particularly important in countries like India, where, despite the presence of many good audit firms, almost two-thirds of Nifty 500 companies and around one-third of around 2,000 companies listed on the NSE mainboard were audited by only six firms in FY 2023-24. These numbers suggest more denial of opportunities to other deserving firms.

While joint audits offer significant advantages, their implementation faces a number of challenges, most likely to be perceived as leading to additional cost to the company. However, the experience suggests that it is not the case and more importantly, the long-term benefits of a more comprehensive and credible audit can outweigh the initial cost increase.

It must be remembered that quality costs everyone the same, whether large firm or not so large. Hence, compensation also must be configured accordingly. Effective joint auditing often requires utilising specialised collaboration and data analysis tools, which may necessitate an initial investment in technology by the audit firms, but these will streamline the audit process and enhance overall efficiency in the long run.

Another challenge that might come up is the perceived gap in skillsets of various joint auditors—particularly audits involving local affiliates of the big six firms and other local firms. However, it needs to be acknowledged that currently, across India, there would certainly be more than 30–40 audit firms that stand the test of quality equal to such local big six firms.

Another aspect of this duality is that often, after being pointed out the lapses in audit conducted by some of the large names, the tendency is to point fingers at other firms.

However, one cannot disregard the number of incidences, in India as well as abroad, where audit lapses have been identified in audits conducted by all large firms individually across the group as well as other firms. Basically, it is about the professional behind the audit and not of the audit quality systems followed by the firm as a policy, which can be the case irrespective of the size.

Consistent exposure to bigger audits and complex issues will certainly lead to elevating the expertise of deserving growing firms. This also would help reduce audit concentration risk for the country.

Embracing collaboration through joint audit holds immense potential to elevate the Indian auditing landscape to a global standard by way of fostering knowledge sharing and leveraging diverse expertise.

By nature, all the audit firms in India are local firms run by local professional brothers. It may not be a good idea to create the ill-informed differences among the professionals as large and not so large.

Quality and the accreditation towards quality by ICAI should be held at the helm. By providing such a supportive regulatory framework, all stakeholders can work towards a robust and future-proof auditing ecosystem that will not only bolster investor confidence in Indian companies but also position domestic firms to play a leading role in this evolving field.

This, in turn, will contribute to the continued growth and success of India Inc. Let's seize this opportunity to work together and propel the Indian audit profession to new heights.

Sandeep Welling is a managing partner at Kirtane and Pandit LLP.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.