Why is the person conducting the financial audit referred to as a "Statutory Auditor," whereas individuals conducting other legally mandated audits — such as internal audits, cost audits, or secretarial audits — are known only by the specific names of those audits?

Understanding the Nuance Behind Audit Terminology

In the world of corporate governance and compliance, we often come across various types of audits—financial audits, internal audits, cost audits, secretarial audits, and more. Many of these are legally mandated under the Companies Act, 2013, and other applicable regulations. Yet, intriguingly, only one category of auditor is commonly referred to with the prefix “statutory”: the Statutory Auditor, who is responsible for auditing a company’s financial statements.

This raises a logical and thought-provoking question:

If internal audits, cost audits, and secretarial audits are also mandated by law, why is only the financial auditor referred to as the “Statutory Auditor”?

Let’s explore the origins of this terminology and examine whether it's time for a terminological rethink.

Decoding the Term “Statutory”

The term statutory refers to anything that is legally mandated or required under a statute. Therefore, in theory, any audit that is prescribed by legislation should be classified as a statutory audit.

Under the Companies Act, 2013:

• Internal Audit is mandated for certain classes of companies under Section 138.
• Cost Audit is required for companies engaged in specified sectors under Section 148.
• Secretarial Audit is compulsory for certain categories of companies under Section 204.
• Financial Audit, conducted by a Chartered Accountant, is governed under Section 139 to 147.

All of these audits are, by definition, statutory in nature. Yet, paradoxically, it is only the financial auditor who is designated with the formal title “Statutory Auditor.”

A Historical Perspective: The Evolution of Audit Roles

To understand this inconsistency, we must trace the evolution of auditing in India—and globally.

Financial audit was the earliest form of audit to be institutionalized. The requirement for an independent assessment of a company’s financial health and accuracy of its accounts has long been a foundational element of corporate governance. This audit function was entrenched in corporate law much before the concepts of cost audit, secretarial audit, or internal audit were formalized.

In the early phases of company regulation, the Statutory Auditor was the sole mandated auditor under the law. As a result, the term became synonymous with the role of the external financial auditor appointed under statutory provisions to give an opinion on the company’s financial statements.

Later, as corporate operations grew in complexity and scale, additional audit functions were introduced to enhance oversight in specific domains. These newer audits were named based on their area of specialization—such as cost, internal, or secretarial—without adopting the “statutory” prefix, even though they, too, were legally required.

Is It Time to Rename “Statutory Auditor” as “Financial Auditor”?

This brings us to a contemporary debate:

Should we consider renaming the “Statutory Auditor” as the “Financial Auditor” to promote consistency and clarity?

Arguments in Favor of Renaming:

• Clarity for learners and professionals: The current nomenclature often causes confusion among students, new professionals, and even corporate stakeholders, who may assume that only financial audits are statutory.
• Alignment with naming conventions: Renaming would ensure consistency with other legally mandated audits (e.g., cost audit, secretarial audit), which are identified based on their functional domain.
• Functional accuracy: The term “Financial Auditor” more precisely describes the auditor’s role—auditing the financial statements—rather than just referencing the legal requirement.

Arguments Against Renaming:

• Regulatory and legal entrenchment: The term “Statutory Auditor” is deeply embedded in laws, regulations, case law, academic literature, and professional standards.
• Risk of confusion and disruption: Changing the terminology now could lead to widespread confusion, requiring amendments across multiple statutes, rules, regulatory filings, and professional syllabi.

Final Thoughts: Reimagining Audit Terminology

There is no absolute right or wrong answer to this debate—only a need for informed discourse. As the audit profession continues to evolve in response to growing expectations around accountability, transparency, and corporate governance, it may be time to revisit traditional terminology and assess whether it remains fit for purpose.

A well-informed terminological shift—grounded in logic, clarity, and consistency—could contribute to improved understanding and communication in the corporate and compliance ecosystem.

Until then, the term Statutory Auditor will continue to occupy its long-held space in corporate parlance—symbolizing a legacy rooted in the earliest days of statutory financial accountability.

Disclaimer:
This article is intended for informational purposes only. While every effort has been made to ensure accuracy, readers are advised to refer to the relevant statutory provisions, rules, and professional guidelines before making any decisions. This article does not constitute legal advice, and no liability is accepted for any reliance placed on its contents.

From the desk of CS SHARATH