Auditors along with credit rating agencies have been in the doghouse and suffering from a crisis of confidence. If the raters blithely assigned AAA+ rating to what in hindsight turned out to be junk bonds triggering a financial crisis in 2008 in the US mortgage bonds market, auditors have been accused of striking a Faustian deal with their clients — I will gloss over your accounting manoeuvres in return for a hefty fee as it happened in the infamous Satyam Computers.
A bemused reader of accounts often found the auditor listing out several irregularities and yet saying the accounts gave a true and fair picture whereas conscientiously he ought to have given a negative report.
Auditors have done more to erode their credibility by avariciously hogging all the work relating to the organisation they were the auditors of. Thus, if ABC, a partnership firm or a limited liability partnership, was appointed the statutory auditors of a listed company at its AGM, the management would appoint CBA as its internal auditor, BAC as its tax consultant, and ACB as its cost auditor.
The game went on making all exercises farcical. A statutory auditor doubling in as its tax consultant through the clever sleight of hand in floating multiple firms with common partners is the ultimate travesty. A tax consultant is an expert in reporting as little taxable profits to the taxman as possible whereas shareholders need a profit and loss account bubbling with profits. This situation exemplifies worst conflict of interest if the same auditor were to offer his services in both the areas.
Peer Review Is Perfect
Ideally the work of one professional should be reviewed by a peer. Peer review is common in modern hospitals abroad especially in the USA so that the surgeon remained on his toes. Mortality on the surgical bed rankles and is also followed by barbed taunts from fellow doctors including pathologists at the periodic mortality conferences. Thus, a statutory auditor must be independent of the internal auditor just as a tax auditor ought to be neither the statutory auditor nor the internal auditor of the same organisation.
Partners of an accountancy firm multiplying themselves amoeba like into numerous firms is not only incestuous but does harm to the credibility of all the exercises. Whereas an independent statutory auditor, an independent internal auditor, an independent tax auditor would result in a healthy cross verification of each other’s works and thus keep all of them on their toes. Dual audit is no doubt expensive but that is any day better than the farce of same person morphing into a new role by donning multiple robes.
Our Company law has been indulging companies by fostering the lulling and cosseting notion that disclosure was an effective dispute to strict Chinese walls. Thus, if under the umbrella disclosure ‘fees’ statutory audit fees, management consultancy fees and tax audit fees were disclosed separately it was supposed to exorcise the accounts from the malady of conflict of interest. That such disclosures were mere cosmetics was lost on our lawmakers.
In this context the following findings of a recent survey on corporate governance is revealing that:
"Independence is one of the most important expectations from Statutory auditors. To ensure this, there has been increasing focus on reducing, if not eliminating, non-audit functions being performed by statutory auditors. Information regarding non-audit services provided by statutory auditors, and the amount paid to them for such services, is difficult to access given the wide variation in the manner in which these matters are reported in the Annual reports."
NFRA Intervention
It redounds to the credit of the accounting regulator National Financial Reporting Authority (NFRA) that it has asked large companies to cease and desist. It has rightly raised and set the bar — disclosure cannot make up for incest and conflict of interest. It is heartening to find the auditing fraternity in India except S.R Batliboi & Co falling in line with the NFRA diktat of the statutory auditor not spreading itself thin into all conceivable areas.
NFRA has joined the global trend in restoring the credibility of the accounting profession not only through the diktat of erecting strict Chinese walls between various accounting professionals bestowing their attention on a firm but also by pulling up erring auditors from time to time and going to the extent of barring them from future audits. A CA has had the mortification of being barred from practice for ten years besides being slapped with a penalty of ₹20 lakh for slack audit by NFRA.
This is not an isolated intervention by the accounting watchdog. Established under section 132 of the Companies Act, 2013, NFRA has been sending fear down the spines of the auditing professionals with its no-nonsense attitude. That it is has stopped auditors from simultaneously wearing several other hats like management consultant, tax auditor etc. in the same client organisation is yet another feather in its cap.
—The author, S Murlidharan, is a Chartered Accountant. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Mar 14, 2024 10:38 AM IST
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