Audit regulator National Financial Reporting Authority (NFRA) has urged the audit fraternity to refrain from taking shelter under the much venerated description of the auditor “being only a watchdog and not a bloodhound”.

Describing this as a “serious misconception”, NFRA Chairman R Sridharan, in a speech that was to have been delivered to an ICAI event of Western India Regional Council (WIRC) but now published on the NFRA website, noted that this description needs to be “exorcised from our minds”.

Sridharan was to be the chief guest at the WIRC’s regional conference on December 24 but the speech was rescheduled to December 26. However, the speech never happened as the WIRC communicated to him that it was not possible to accommodate him in the schedule. Subsequently, the NFRA uploaded the speech on its website on December 24.

‘Far-reaching consequences’

It may be recalled that Lopes L J had in 1896, in the famous Kingston Cotton Mill Co case, noted the “watchdog” formulation and highlighted that “An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog, but not a bloodhound. He is justified in believing tried servants of the company in whom confidence is placed by the company”.

Sridharan said: “This misconception has very far reaching consequences. The law on the fraud related responsibilities of the auditor has moved far ahead of what it was in the 1890s. We need to forget the watchdog and not bloodhound description.”

Sridharan’s remarks are significant as some members of the audit fraternity in India were taking the stance of “auditors being only a watchdog and not a bloodhound” in defence of some of major audit failures in recent years, such as IL&FS.

The NFRA Chairman said the point that needs emphasis is that good audit quality starts from getting the very elementary basics right. “If this is not taken care of, any talk of nuanced professional judgments in arcane business and financial matters would have to be regarded only as smokescreens meant to mislead. The foundation of good audit quality is independence,” he said.

Sridharan also highlighted that India has already built into law the separation of audit and non-audit services that other countries are only now attempting to achieve. The separation of audit and non-audit services — being undertaken in developed countries — is expected to boost auditor independence around the world.

Related Topics
comment COMMENT NOW