Audit firms wary as govt proposes to tighten rules
Mumbai, Apr 6, 2026
Synopsis
New rules on auditor independence are causing worry among Indian audit firms. These changes could affect how audits are priced and limit choices for companies. Experts believe the proposed three-year ban on non-audit services after an audit tenure is unique and potentially anti-competitive. This could lead to fewer firms auditing large clients and higher audit costs for businesses.
Audit firms in India have expressed concerns about the proposed tightening of rules regarding auditor independence. These changes, they say, could disrupt audit economics, limit options for companies, and lead to increased market concentration.
The ministry of corporate affairs (MCA) has proposed tighter auditor independence rules via an amendment to the Companies Act to expanding restrictions under Section 144. The proposed amendment prohibits audit companies from providing non-audit services to clients for three years after tenure.
According to industry experts, two points stand out: the proposal prohibits "any" non-audit services without specifying the scope and extends this to three years after the audit.
Yogesh Sharma, group managing director, BDO, said, "While there has been a concept of a cooling off period prior to acceptance of an audit engagement in certain overseas geographies, a cooling off period for non-audit services after the end of an audit tenure is fairly unique."
Tougher audit rules risk shrinking choice, raising costs and accelerating market concentration: Cos
Sharma said that in the absence of any global regulations or experience, whether this move will enhance audit quality is debatable. "The law, as it stands, provides multiple safeguards already-Section 144, audit committee approvals and inspection mechanisms," Sharma said.
The auditors ET spoke with said that most global firms operating in India, including Deloitte, KPMG, PwC, GT and BDO, already avoid even "allowed" non-audit work during the audit period. So extending this by another three years comes across as excessive and potentially anti-competitive.
"Audit firms build deep institutional knowledge during audits, and companies often turn to them later for advisory work because of that understanding, so there is little reason to restrict it, as long as it is not linked to audited matters," said the CEO of an India audit firm, requesting not to be named.
India already has a one-year cooling-off rule for bank auditors under Reserve Bank of India (RBI) norms, but experts said that extending it to three years lacks evidence of improving audit quality, as successor auditors review subsequent financials, diluting any influence.
Auditors predict that if the three-year rule is maintained, two scenarios are likely. It may impact mid-sized and smaller organisations more because they rely on ongoing advisory work, whilst larger firms may afford to wait it out, thereby increasing concentration. At the same time, even large firms will become far more choosy, as taking on an audit effectively locks them out of that customer for eight years, completely changing the economics.
The audit costs are likely to rise too. "You can't recover lost advisory revenue later, so audit fees will have to reflect that," said a senior partner of a Big Four audit firm.
He said it also creates a policy contradiction, as such rules sit uneasily with the government's push for multidisciplinary CA firms.
Mandatory audit rotation under Section 139(2) of the Companies Act, 2013 is currently underway, with hundreds of listed companies required to rotate auditors. This regulation could impact their client acquisition strategy.
"The decision to bid for or continue an audit will now factor in long-term opportunity loss," said another senior partners in a Big Four firm, adding that firms will start prioritising clients more selectively based on overall lifetime value rather than just audit mandates.
Experts also said that group-level restrictions could significantly complicate large multinational audits, especially since independence is assessed at the network level and may apply across the entire firm network.
[The Economic Times]
