Towards better auditing

Auditing has turned out to be one of the most risky professions in recent times thanks to a multitude of entities that have transgressed accounting norms and have been blessed by auditors either by choice or by ignorance. Like most other things, they commenced in the West and spread across the globe.

Post the US accounting scams, the Treasury Department's Advisory Committee on the auditing profession adopted a report containing more than 30 recommendations to improve the sustainability of the auditing profession. The three main sections of the report were on human capital, firm structure and finances and concentration and competition.

While the recommendations are not expected to set the profession aflame as they do not contain any unknown unknowns, some can be adapted to suit present times.

The report, perhaps visualising a scenario in which we could have a shortage of auditing personnel soon - something that could apply to India too in the near future - deals with strategies to maintain a steady supply of human capital to the profession, including implementation of accounting education curricula and content that continuously evolves to reflect current market developments to help prepare new entrants to the profession among other things.

Sharing experiences

On structures of firms and finances, the report recommends the creation of a national centre at the Public Company Accounting Oversight Board to provide a forum for auditing firms and other market participants to share their fraud detection experiences in order to improve audit quality, enhancement of disclosure requirements regarding public company auditor changes, enhancements to make the auditor's standard reporting model more useful to investors by including more relevant information, such as key accounting estimates and judgments and a requirement for larger auditing firms to produce a public annual report with relevant firm information and file on a confidential basis with the PCAOB audited financial statements to improve transparency at auditing firms.

On concentration and competition, the report recommends creation of a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms to prevent reduced auditor choice and significant market disruptions and enhancement of collaboration and coordination between the PCAOB and its foreign counterparts so that investors can be confident that auditing firms of all sizes are contributing effectively to audit quality.

The PCAOB has acted on the recommendations to make the auditors' report more comprehensive.

Auditors' report

Audit reports in India and globally generally use the same non-committal language. Apart from the Companies (Auditor's Report) Order (CARO), there could be elements of assumptions and judgement that have been used by the auditor in the performance of his function. Right now, these may not find a mention in the audit report but could be placed in the notes on accounts.

One of the risks in giving specific tasks to the auditor such as true and fair view and CARO could bind him to these areas at the cost of others which could turn out to be mine-fields. Apart from these specific areas, the auditor should be given a free hand to report on any matter that in his opinion deserves to be commented on.

For instance, the auditors for British Petroleum seem to have achieved the perfect balance in audit reports by commenting on the Gulf of Mexico oil spill as “The total amounts that will ultimately be paid by BP in relation to all obligations relating to the incident are subject to significant uncertainty and the ultimate exposure and cost to BP will be dependent on many factors. Actual costs could ultimately be significantly higher or lower than those recorded as the claims and settlement process progresses. Our opinion is not qualified in respect of these matters”.

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

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