Joint Audit is not a magic wand

In recent times, joint audits have been a subject of debate in the audit markets worldwide including India. The idea, which simply means two auditors carry out the statutory audit and prepare a joint audit report as compared to one single auditor, has been increasingly gaining traction among accounting regulators as a way to enhance audit quality and improve competition in the markets.

Concerns over audit quality have been emanating amid rising business failures and accounting scams, while the issue of competition has arisen as the Big Four firms – EY, Deloitte, KPMG, and PwC – hold the dominant significant share in the markers capturing as much over 90% in some economies like the UK and the US; in India, their concentration is about 70% by market capitalisation.

The International Experience

Joint audit is not a new phenomenon, it has been used internationally in the past. In France, a joint audit became a legal requirement in 1966, while in South Africa, a joint audit is mandatory for firms operating in financial services.

In India, it is mandatory for PSU and insurance companies and in April 2021, the Reserve Bank made it mandatory for financial entities with assets size above Rs 15,000 crore. The latest development in India is now that a government panel has recommended a mandatory joint audit rule for public interest companies; the proposal is yet to see the light of day.

The world’s largest economy, the US, does not have joint audits. In the UK, the regulators have been mulling joint audits, however, the proposals have now toned down to what is called managed shared audit in which one firm becomes the main auditor and the other audits a small part; unlike the mandatory joint audit where the responsibility gets divided, the primary responsibility in the shared audit remains with the main auditor.

Does Joint Audit Work?

Sudhir Soni, Head of Audit, at BSR and Co, KPMG’s audit affiliate, this week, shared his views for the first time on joint audit exclusively with ETCFO. The audit veteran batted against joint audits and said there is no empirical evidence that it improves audit quality. Instead, he argued it increases risks as he felt that responsibility gets divided and allocation of work may be missed. Also in the current Indian regulatory framework, sharing of work papers is not allowed between the two auditors, he pointed out and feared that this may actually impact audit quality further.

To tackle the competition issue via joint audits, Soni had reservations, too, wondering if that is the best solution available at hand for the regulators. Questions could arise whether firms engaged in joint audits for a company will have the same capabilities, he said.

A contrarian perspective exists, too. Experts batting for joint audit are of the view the risks emanating from this idea could be addressed as has been echoed by the government panel.

This government committee which is for joint audit, and headed by corporate affairs secretary Rajesh Verma, suggested each joint auditor will be liable only for the work allotted to her pursuant to mutual discussions with other auditors taking part in the joint audit. Also, noting the expenses associated with joint audits, the committee suggested that the mandate should be restricted to a class or classes of companies.

While the views on both sides of this debate are strong, joint audits should not be seen as the magic wand to tackling the issues of audit quality and competition. Neither should it be seen as a measure that cannot succeed even if there is no empirical evidence to suggest in the past. The growing corporate landscape of the country may eventually warrant the need for joint audits even if not right now.