Auditors in charge of corporate accounts have a dual responsibility, one to the corporate management and its shareholders and the second, to the public at large. In the US, accountants are barred from providing most non-audit services to firms they audit. This rule was introduced after Arthur Andersen had gone easy on the crooked energy firm, Enron, to protect its lucrative business.
It may be true that doing internal audit gives extra knowledge to the auditor about the client and he may be able to function as a better external auditor too. But, as pointed out by the head of the Institute of Internal Auditors, the combining of both functions has the potential to cause serious conflicts of interests.
The European Union cautioned in October 2011 about threats to the integrity and independence of the auditor and favoured continent-wide regulation of the audit industry. The US's Public Company Accounting Oversight Board warned that the profession may regress and compromise its independence. Audit is supposed to be a cold-eyed outsider's look at company's finances. For an auditor to provide its clients with tax advice, involves a closeness that makes some observers nervous. In India, the auditor takes charge of every function relating to the registration of the company including preparation of the Memorandum and Articles of the company, statutory audit and filing of the income tax return. British experience shows that corporate citizens can hide their true identity in a maze of interlocking companies, or even use places like British Virgin Islands where anonymity is legally protected.
The search for the real names and address of such companies often leads us nowhere. The trail goes cold with a nominee, generally a lawyer or accountant, who shields clients from nosey outsiders. The Economist points out that the device of registering companies in foreign locations can benefit the devious, the tax-shy, the corrupt and the outright criminal.
Rules have to be tightened and auditors have a big role. In a new book, the Money Laundry, Jason Sharman, an Australian academic, notes after research that companies can be created in various places without using a real verified ID. Shell companies are formed without requiring proper documents. They are also able to open bank accounts abroad.
The American administration considers reform of the law relating to company registration as critical to its new crime fighting strategy. Attempts are under way in the US Senate to make disclosure of beneficial ownership a condition for company registration. The French Financial Action Task Force has recommended that rigorous steps be taken to prevent abuse of corporate structure. Banks have to identify their customers. The British Financial Services Authority lambasted banks for their failure to investigate their customer's real identity. Indian authorities are prone to take company registration at face value. Undeclared beneficial ownership of companies rarely comes to light. Several years back, it was reported that a leading corporate house in India has got more than 250 firms registered abroad in various names.
Nexus with Politicians
In an open letter to the Government of India in October 2011, some of the most respected entrepreneurs have “acknowledged the strong nexus that exists between certain corporate houses, politicians, bureaucrats and power brokers. This is one of the greatest threats for the Indian economy”. Who can have better knowledge of such nexus than the auditor?
The chartered accountant is bound to follow the discipline enjoined by the Act of 1949. He may be liable for damages under civil liability or under consumer protection law or sometimes even under the criminal law, if his action becomes vulnerable under such other laws. Certifying the accuracy of the accounts requires great care and caution. The tax audit report is a sacred document. It is specifically made for the income tax department. Generally it should be unqualified. There should be a specific clause in the audit report to find out if the auditor made any attempt about foreign accounts, if any, disguised or open, maintained by the corporate house or the real person in charge of the corporate house.
There should also be a column to bring forth the real beneficial owner of the company.
The integrity and the independence of the auditor can never be compromised. The auditor cannot act as a mere post office in transmitting qualified audit reports to the income tax department. He must exercise such reasonable care as would satisfy a man that the accounts are genuine, and that there is nothing to arouse suspicion of honesty. If he does that, he fulfils his duty.
The auditor is the king-pin in safeguarding the interests of the company, its shareholders and Government revenues. His role in finding out foreign accounts of corporate houses is crucial and critical in matters connected with the promulgation of an amnesty for foreign secret accounts by Indian income tax authorities.
(The author is a former Chief Commissioner of Income-Tax.)