The recent debacle of large corporate in U.S. and the growing awareness about corporate governance in India has led to the setting up of Naresh Chandra Committee to Report on "Corporate Audit and Governance". This high level committee has been set up by the Department of Company Affairs under the Ministry of Finance and Company Affairs. U.S. has already enacted the Sarbanes-Oxley Bill, popularly called SOX Act. This Act, has brought with it fundamental changes in virtually every area of corporate governance and particularly in auditor independence. It is expected that SOX Act, will do more to change the contours of board structure, auditing, financial reporting and corporate disclosure than any other previous law in the US history.

The Enron debacle of 2001, which brought to surface the auditing lacunae and that eventually led to collapse of Andersen, is a major happening affecting the Audit profession. The Enron debacle of 2001 has raised question mark on statutory auditor & company relationship and more so on independence of auditor due to acceptance of non-audit assignment by the statutory auditor.

In fact, one of the main area which Naresh Chandra committee has been entrusted to analyze and recommend changes if any (amongst other things) is - Statutory Auditor & Company relationship. The Committee believes that the propriety of the auditors rendering non-audit services is a complex area, which needs to be carefully dealt with. It says, that certain types of non-audit services could impair independence of the auditor and possibly affect the quality of the audit. It also believes, that given the times and the well-publicized failure of an auditing firm as large as Andersen, some judicious prohibitions are in order.

The Committee has recommended ten measures for maintaining Auditor's independence. These relate to restriction on acceptance of non-audit assignments. The committee has prescribed list of prohibited non-audit services and has also suggested independence standards for consulting and other entities that are affiliated to Audit Firms. It also recommends for compulsory Audit partner rotation, Auditor's disclosure of contingent liabilities, Auditor's disclosure of qualifications and consequent action & Auditor's annual certification of independence.

Certain steps such as reading out of qualifications by Auditor at AGM, rotating partners and at least 50 per cent of the engagement team every 5 years, disclosure in plain English language of Company's contingent liabilities and auditor's observation there upon are welcome steps and if implemented, still better corporate governance level can be achieved.

The Committee has very aptly touched the issue of undue dependence on a particular client in terms of fees received on account of audit as well as non-audit assignments. It says, there should be prohibition of undue dependence. Where an audit firm has subsidiary, associate or affiliated entities, 25% of revenue coming from a single audit client should be widened to accommodate the consolidated entity, i.e. Auditing services and non-audit services considered both. This observation is very relevant as undue reliance on a particular client, is likely to affect the independence of Auditor and hence this recommendation is more than welcome.

Though Indian corporate as well as Audit Firms have so far remained insulated against viruses of auditor-company relationship and Indian auditing firm's integrity and independence has not been in doubt in the present economic downturn, the steps suggested by Naresh Chandra Committee are proactive and should be implemented. Institute of Chartered Accountants' of India's self regulatory measures and stringent corporate governance guidelines, which rank among some of the best in the world, are already there, still it seems there is wide gap between prescription and practice and hence recommendations of the Committee do have great relevance to achieve still better corporate governance.

It is said, that whenever unfettered, unbridled and unguarded freedom is given, the same is likely to be misused, sometimes even by the virtuous of the virtues. If this seems to be the true adage, the Naresh Chandra committee recommendations on Auditor's independence are welcome.