The Hindu Business Line : Auditors role: More to it than meets the eye

A chartered accountant at an Indian affiliate of one of the global ‘big four’ accountancy firms says the scale and the period over which the fraud at Satyam happened indicate this is “highly highly unlikely, near impossible.”

According to the Satyam Chairman’s letter , none of the directors or senior management knew of what was happening. “How can there be fictitious cash and bank balances of Rs 5,000 crore without the knowledge of the auditors? Auditors are supposed to independently confirm this with the bankers. The scale and the duration of it all completely beats me,” the official said.

The Institute of Chartered Accountants of India (ICAI) for the last four or five years has been following the concept of peer review, he said: “One firm looks at the processes and controls of another firm, makes sure it has the right check list, makes sure there is a high level of scepticism, and the right rigour to the audit. The auditor’s job is to be unpopular.” It is likely that on account of the Satyam episode at least some of the Indian listed companies bring in more rigour in the reporting of their next quarterly results, said another chartered accountant.

For IT companies, revenue comes from contracts in stages over a period of time. There ought to be the right method of revenue recognition. Client status and billing status details should be available. How is it that nobody questioned the budgeting process, asked the accountant. The revenue recognition concept appears to have been misutilised here, he said. Anyone who is a good auditor knows how to go about searching out orders and contracts and agreements to figure out how much of revenue will come from a project and at what time lag, he said.

It is all the more unbelievable that none of the auditors, directors and management had knowledge of the fudging because somebody would have had to make an entry of numbers into the system, he said. “It is all the more difficult to believe this especially when a company has a sophisticated ERP system connecting all its processes and systems,” he added.

There is more than meets the eye, agrees Mr Akil Hirani, Managing Partner of international lawyers Majmudar & Co, commenting on whether the board was in the loop. A distinction should be made between the whole-time and independent directors. Nevertheless, the entire board can be made liable and the onus is on them to prove that they had dissented on any fraudulent actions, he observed.

There are several laws that cover corporates, he said, but some areas need tightening, like the role of the independent director that needs to be further spelt out. Also, the penalty on auditors for not pointing out inaccuracies needs to be increased to about Rs 25 crore, from the paltry penalty of about Rs 10,000 now – making auditors too pull up their socks.

Corporate lawyer Mr Y.P.Trivedi observed that more periodical reviews need to be done to prevent such developments. The Government needs to take measures to get the small investor and depositor insured against such frauds, he added.

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