IRDAI reduces audit firm term to bolster audit quality

Insurance regulator IRDAI’s new corporate governance guidelines have reduced the engagement period of statutory auditors with insurance companies. Audit firms now have a four-year term for joint statutory audits, followed by a mandatory three-year cooling-off period, according to the IRDAI’s Master Circular on ‘Corporate Governance for Insurers 2024’.

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During this cooling-off period, outgoing auditors and their affiliates are barred from undertaking investment risk management or concurrent audits of the insurer. Additionally, incoming auditors must not include any affiliates of the retiring auditor. Previously, audit firms could serve up to ten years, but the new rules ensure a fresh review of financial statements every four years to enhance audit quality and to reduce complacency.

Commenting on latest IRDAI move,  Jaspreet Bedi, Partner, Nangia & Co LLP, said “the auditor refresh policy is to promote independence, impartiality, and integrity in the audit process.”

The latest change on audit firm tenure enhances transparency and accountability by introducing new auditors at regular intervals of four years, preventing complacency, and maintaining rigorous financial reporting standards, Bedi said.

‘Very short’

However, G Ramaswamy, former CA Institute President, said IRDAI’s move to introduce four year term is “very short” and needs to be enhanced to five or seven years. “Already the Companies Act provides for five years with reappointment for another five years. IRDAI should align it with five years as given in the Companies Act and then give a three-year cooling-off period ”, Ramaswamy told businessline.

Already the Insurance Regulatory and Development Authority of India (IRDAI) guidelines stipulate a mandatory joint audit for all insurance companies.  In India, joint audits are currently mandatory for banks, public sector undertakings and insurance companies. 

Meanwhile, under the latest master circular on corporate governance, IRDAI has stipulated that an audit firm should be entitled to carry out Statutory Audits of not more than three insurers (life/general/health/reinsurer) at a time. 

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Also it has been stipulated that an audit firm should not have the audit assignments of more than two insurers in one line of business (i.e life insurance, general insurance, health insurance and reinsurance) at a time.

The latest IRDAI master circular also highlighted that existing audit firm appointments for period of five years would have to be continued.