Audit firms need proper supervision

K. P. Shashidharan | Updated on November 15, 2017

Auditors should exercise professional scepticism and look for areas where financial statements might be susceptible to fraud.

The need for regulating audit firms has been felt globally during the years, especially after the Enron-Andersen-dotcom-telecom meltdown around the turn of the millennium. Consequently, new regulations like Sarbanes Oxley Act, 2002, Dodd-Frank Act 2010, new auditing standards like Statement on Auditing Standard (SAS) 99 of 2002 and creation of an oversight body like the Public Company Accounting Oversight Board (PCAOB) emerged in the US to address this growing concern of the stakeholders. The Sarbanes-Oxley Act authorises the PCAOB to inspect registered firms for compliance with applicable laws, rules, and standards in a firm's audit work for clients that are securities brokers or dealers.


Recently, it was reported that PwC, the auditors of Satyam Computer Services Ltd had to pay $25.5 million to compensate investors who suffered losses in the scandal; because the firm, in the words of the Securities and Exchange Commission, was “failing to comply with some of the most elementary auditing standards and procedures.”

Though investors across the globe were compensated, Indian investors were left out; one of the reasons may be that there is no oversight body like PCAOB in India. ICAI may conduct peer reviews of firms but has no mandate for inspection of firms. While CAG of India conducts supplementary audit over and above the chartered accountants' audit of Public Sector Undertakings in India, there is no oversight body inspecting and reviewing the quality of audit conducted by CA firms in India, unlike what PCAOB does in the case of audit firms registered in the US stock exchanges.

RBI conducts inspection of bank audits; Securities and Exchange Board of India exercises some control on listed companies and the IRDA regulates insurance companies to avert creative accounting juggleries in those entities where substantial public funds are at stake.


Repeated failures by accounting firms complying with generally-accepted auditing standards (GAAS) indicate deficit in professional ethics. It is the need of the day to develop an effective oversight body in India too, to oversee the risk of fraudulent financial reporting, apart from adhering to good corporate governance framework, including the whistle-blowing mechanism and some other best practices like adequate internal controls, independent verifications by internal and external auditors reporting directly to the audit committee.

In order to assure that the financial statements of the audited entity are free of material misstatement, Accounting and Assurance Board of AICPA introduced Statement on Auditing Standard 99 in 2002. ICAI has also formulated corresponding Standard on Auditing SA 240 relating to fraud in financial statements.

According to the auditing standard, auditors should exercise professional scepticism and enquire and look for ‘how and where the entity's financial statements might be susceptible to fraud and material misstatements, requiring the auditors to go beyond the audit process to look for impact of compliance deviations and their outcome, providing also an exhibit outlining the types of controls and programmes to be examined before providing audit assurance.

Hopefully, the new Companies Bill, 2011, may contain effective regulation and adequate oversight mechanism to safeguard the interests of the investors.

Best practices followed by the CAG institution in case of PSU audits, like rotation of auditors, joint auditors for bigger companies, disciplinary cases against deficient audit firms, rules for maintaining independence of auditors, are worth considering for implementing in the case of private companies too.

(The author is Director-General, CAG Office.)

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Published on January 22, 2012
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