The Hindu Business Line : Shackling to make independent

What over-regulation does is to try and catch a few black sheep in the profession amongst thousands that are clean. But warts will remain in any case.

The Chartered Accountants (Amendment) Act, 2006 is now in full force. While the provisions of the Bill were not intended to turn the present provisions topsy-turvy, there are a few that merit attention. Chapter VIA of the Act establishes a Quality Review Board (QRB) whose purposes are to:

Make recommendations to the Council with regard to the quality of service provided by the members of the Institute.

Review the quality of services provided by the members of the Institute including audit services.

Guide the members of the Institute to improve the quality of services and adherence to the various statutory and other regulatory requirements.

Members are entitled to conjecture that this is just an extension of the present Peer Review with a different name. However, the inclusion of the words `audit services' in the second limb has an ominous ring to it considering that we are used to an Institute that judged whether a member was guilty of professional misconduct or not and levied soft penalties.

Audit Quality Forum

In the UK, the Audit Quality Forum (AQF) was formed two years back with the rather innovative intent of supporting shareholder involvement in the audit process. It was thought that the auditor, in the course of his professional responsibilities, developed a relationship with the company's management although his ultimate responsibility is to the shareholders.

This relationship should not affect his objectivity and independence. The AQF proposed to put written questions to the auditors, publishing their engagement terms, encouraging greater clarity in auditors' resignation statements and generating competition in the listed company audit market.

Although the AQF has not exactly set the Thames on Fire, it did give rise to a healthy debate, prominent amongst which was to appoint auditors for a fixed period of, say, five years without instilling in them the fear of removal — under the logic that one can never be truly independent of those who have the power to sack you.

PCAOB

In the US, the Public Company Accounting Oversight Board (PCAOB) has kept itself busy inspecting audit firms and checking the quality of the audit done as was empowered to them under the Sarbanes Oxley Act. While it is nice to see someone give advise as to how to improve the quality of an audit or improve documentation in the auditor's office, what is not nice to see is the punishment in case the audit firm or the partner has been found guilty of negligence in duty — forcing him to seek a different occupation since he cannot practice as a partner in any audit firm in the US.

Forcing independence?

One common factor that appears to be emerging across the world is to put shackles on the audit profession in order that they become independent. While there can be no two thoughts that independence is a state of mind and cannot be forced by legislation, going overboard with such legislation only makes the auditor more conscious of the fact that he needs to be independent and objective — a fact that is pre-assumed.

What over-regulation does is to try and catch a few black sheep in the profession amongst thousands that are clean, ignoring the fact that the warts will remain in any case. Resultantly, under the present dispensation, if an auditor has a choice between an audit that earns him Rs 1,00,000 per annum and a consultancy that earns him double, which would he choose? The answer is obvious.

(The author is a Hyderabad-based chartered accountant.)

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