Are Listed Company Auditors Compulsorily Subject to Peer Reviews?

The requirement for listed company auditors to undergo peer reviews is a common practice in numerous jurisdictions worldwide. This practice is designed to enhance the credibility and reliability of the audit process, ensuring that auditors adhere to professional standards and best practices. This article explores the regulations and requirements in different regions, providing a comprehensive understanding of the role of peer reviews in the auditing of listed companies.

United States: The Role of the PCAOB

In the United States, the Public Company Accounting Oversight Board (PCAOB) oversees the peer review process for audit firms that audit public companies. The PCAOB mandates regular inspections, which serve a similar function to peer reviews. These inspections help to ensure that audit firms maintain high standards of quality and integrity in their work. The objective is to enhance the credibility of the audit process and protect investors from the risk of financial misreporting.

United Kingdom: The Responsibility of the FRC

The Financial Reporting Council (FRC) in the United Kingdom mandates that the auditors of listed companies must go through a quality review process, which includes peer reviews. The FRC's Quality Review Framework is designed to enhance the reliability and credibility of financial reporting and to ensure that auditors are meeting the highest standards in their work.

International Standards: IFAC and IAASB

At the global level, the International Federation of Accountants (IFAC) and the International Auditing and Assurance Standards Board (IAASB) promote quality control standards that often include peer reviews as essential components of the quality assurance process. These international bodies work collaboratively to establish and promote best practices in auditing and accounting to maintain global standards.

India: SEBI's Listing Obligation and Disclosure Requirements

In India, the Securities and Exchange Board of India (SEBI) has specific regulations for listed company auditors. According to the Listing Obligations and Disclosure Requirements (LODR) Regulations of 2015, every listed company must comply with various audit requirements. These regulations mandate that every audit firm, based on their category, must undergo a peer review process.

Based on the Statement of Peer Review issued by the Institute of Chartered Accountants of India (ICAI), the following categories of Practice Units are subject to peer reviews:

Level I: Audit firms that have conducted any of the following statutory audits within the last three years:

Central statutory audit of public sector banks, private sector banks, foreign banks, cooperative banks, and public financial institutions Central statutory audit of central or state public sector undertakings and central cooperative societies based on turnover or paid-up capital criteria Statutory audit of insurance companies or asset management companies or mutual funds Statutory audit of enterprises with listed equity or debt securities in India or abroad Statutory audit of entities that have raised funds from the public or banks or financial institutions of over Rs. 50 crores during the period under review Statutory audit of entities that have raised donations and/or contributions over Rs. 50 crores during the period under review Statutory audit of entities having net worth more than Rs. 500 crores at any time during the period under review Statutory audit of entities funded by government schemes, central and/or state government, over Rs. 50 crores during the period under review

Level II: Audit firms that conduct statutory, internal, concurrent, systems, or tax audits of branches/offices of public sector or private sector and/or foreign banks, insurance companies, cooperative banks, and regional rural banks, as well as statutory audits of non-banking financial companies (NBFCs). Audit firms under this category are subject to review once in four years.

Level III: Any other Practice Unit providing assurance services not covered in Level I and Level II.

It is important to note that if the audit is statutory in nature, it falls under Level I category. Any audit of branches of the company falls into Level II, but Level I also includes statutory audits of listed companies.

Conclusion

The requirement for listed company auditors to undergo peer reviews is a critical aspect of maintaining the integrity and reliability of financial reporting. This practice is integral to the regulatory framework in various jurisdictions, with specific requirements and guidelines set out to ensure that auditors adhere to the highest standards of professional conduct. Understanding these requirements is crucial for listed companies, audit firms, and financial overseers.

FAQs

Q1: What is a peer review in the context of auditing?

A peer review in the context of auditing is a process where an auditor's work is evaluated by another qualified auditor to assess its compliance with professional standards and adherence to best practices. This review helps to ensure that the audit process is robust and reliable.

Q2: What are the specific requirements for listed company auditors under SEBI's regulations?

According to SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations of 2015, listed company auditors must undergo a peer review process based on their category. The categories and their respective review cycles are Level I (once every three years), Level II (once every four years), and Level III (once every five years).

Q3: Why is the peer review process so important?

The peer review process is essential because it helps to enhance the credibility and reliability of the audit process. By ensuring that auditors adhere to professional standards and best practices, the peer review process safeguards against potential financial misreporting and protects the interests of investors.

Note

For detailed information and specific requirements, it is advisable to refer to the latest regulatory documents and seek guidance from professional bodies such as the PCAOB, FRC, IFAC, and ICAI.