The Hindu Business Line : A staid profession?

Amidst all the talk on putting fetters on auditors and watching over their activities, one should remember that independence and its opposite are but states of mind.

Mohan R. Lavi

To a question as to why an auditor crossed the road before commencing an audit, the answer is he looked into last year’s audit file and that is what was done last year. Such comments on auditors and bean-counters could look out-of-place today as the former has become ever-so-careful and the latter has enough of statutory compliances to cater to that they cannot afford to be seen as lifeless any longer.

The winds of change were triggered by Enron, the Sarbanes Oxley Act and detailed disclosure norms. Clause 49 of the Listing Agreement — a mini replica of the Sarbanes Oxley Act — was amended mandating companies to talk more about their accounting practices.

Hands full

The Institute of Chartered Accountants of India (ICAI) has had its hands full during this period. Apart from its forte of incubating, nurturing and guiding the profession, it had to issue accounting standards to keep pace with international developments and bring out a roadmap to converge with International Financial Reporting Standards (IFRS) — soon to be a necessity than an option. The ICAI acted promptly in quickly releasing Accounting Standards 30, 31 and 32 on Financial Instruments, framing a Convergence Report with IFRS, and pulling a fast one on companies by issuing a last-minute notification asking companies to book derivative losses at the year-end when it had definitive information that there were many skeletons in the derivatives cupboard.

However, it is a fact that the ICAI has done what it should and is waiting for government action to ensure that statutory laws are amended to make way for their recommendations and eventual implementation. A parallel could be drawn to the Mahabharata where Lord Krishna advises Arjuna: “Sukha Dukhe Samey Kritwaa, Labha Labhow Jaya Jayow” — which could be roughly translated as do your duty without expecting the fruits of it.

Sharing working papers?

A recent phenomenon which the ICAI could end up having to tackle is the issue of sharing of audit working papers.

It is apparently becoming a trend for other regulators and audit bodies to ask auditors to share their working papers. The ICAI issued Accounting and Auditing Standard 3 (AAS3) on Documentation — years ago, that is — which contains detailed guidelines for auditors to maintain working papers and their audit files.

The AAS is categorical that the papers are the property of the auditors, which makes sharing them discretionary. There was a mention in Auditing Standard 3 issued by the Public Company Accounting Oversight Board (PCAOB) on audit of internal control over financial reporting that auditors may have to share their working papers with other auditors. If one looks at the issue holistically, this would tantamount to interfering with the privacy of the auditor and could be challenged.

Auditors could justify a stand they have taken or the reason why they have not qualified a particular treatment, on the basis of the books of account, notes on accounts (which is but a parking zone for differential accounting treatment for some companies) and the relevant accounting standards.

The ICAI has a peer review mechanism and detailed guidelines on audit quality to punish erring members. It would not be appropriate for some other institution to take away this duty from the ICAI.

Mixed results

Amidst all the talk on putting fetters on auditors and watching over their activities, one should remember that independence and its opposite are but states of mind. Putting too many shackles on the profession could produce mixed results.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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