Combating the animosity towards auditors

R Anand | Updated on August 28, 2019

Rather than blaming auditors for lapses, it may be worth shifting focus to improving regulation and conduct in the field

An auditor is a watchdog, not a bloodhound. This time-tested statement, which was perceived as the gospel truth for several decades, is now being put to its toughest test by regulators, the media and the society at large. Recent alleged audit lapses have led to a hue and cry, and seem to have launched a virtual surgical strike on one of the most trusted professions in this country. This raises a million-dollar question — Is this an overreaction of sorts or has discontent been brewing over time, now resulting in an explosion?

Lawyers, teachers, doctors and auditors have been the backbone of our society from time immemorial. The fabric of the family system and its businesses was stitched effectively by some outstanding lawyers, exemplary teachers, workaholic doctors and meticulous auditors. All problems of a family were solved by the sagacious advice of these four noble professions. Sadly, in the last few decades, the relationship of these professionals with the targeted constituents is more transactional than advisory.

How many lawyers get questioned when cases of wilful misrepresentation of facts in courts have led to wrong judgments? Ineffective and faulty teaching has churned out millions of unemployable graduates. Do teachers get blamed for this? How many doctors are held responsible for wrong diagnoses and negligent surgeries, which have led to death of many patients? Why is it, then, that only audit lapses are bearing the brunt of negative publicity in certain cases?

My intent, here, is not to belittle the magnitude of the problem on hand, but to get to the root of the issue and view the problem with a proper perspective.

A traditional auditor would spend quality time with the promoter and senior management team of the company in question and carefully assess their body language when answering questions put to them. Many such discussions would be outside the audit’s scope, but would nevertheless highlight where things could go wrong. Today, such meetings are an exception rather than a rule. The use of tools like analytics and prescriptive processes have taken over the audit methodology. This is understandable, given the large volume of transactions to examine.

The personal touch

The modern audit approach is in sync with current trends, where companies increasingly use technology and automation in their processes and controls. However, a by-product of this approach is the loss of personal touch with the senior team of the company; as a result of which, the information flow is sometimes inadequate and not forthcoming, which does affect the quality of audit. The honesty and sincerity of the management in dealing with audit and accounting issues is also a matter of concern. While one can audit documents, papers and evidence that are produced, how does one audit intellectual dishonesty, which is now a widespread phenomnon in the world of business?

The need of the hour is to evaluate whether we have learnt lessons from the Mundhra scam (1957), the Harshad Mehta scam (1992), the Sathyam fiasco (2009), the Kingfisher failure (2016), the PNB scam (2018), and the yet-to-be-concluded IL&FS scandal (2018-19).

It is time that we stop distinguishing quality based on the size of the firms, in cases of audit lapses. There are one too many regulators in India in the auditing field, and the solution to the problem of audit quality is either not be found in the rules and regulations or is reached too late. It must flow from conduct and common sense.

Managing expectations

First and foremost, all stakeholders need to clearly understand the expectations from an auditor in a complex business world. The auditor is still just a watchdog. His/her job is not to be on a constant hunt for information and suspect every transaction. Unless we realise this, the expectation-mismatch cannot be bridged. If most of the audit fraternity stops undertaking audits on account of the consequences of not meeting the existing expectation-mismatch, the economy will come to a standstill.

Second, the issue of multiple regulators in the field of auditing has to be addressed with utmost urgency. How many regulators can act against the auditor on a single matter? For example, if the auditee is a listed bank, then the MCA, the RBI, SEBI, the NFRA and the ICAI can all scrutinise and act against the auditor. It would be better for all stakeholders if there is one nodal regulator, who is authorised to conduct proceedings against the auditor and take action on issues raised by all other regulators. This will also help in bringing the disciplinary competence to a single entity to make it more effective, efficient and timely.

Third, it is critical that the nodal regulator provide opportunities for engagement with auditors, including large, mid-size and small practitioners, as well as with industry representatives to chalk out a clear roadmap for the future of auditing, so that the expectations of the society are met. The regulator cannot operate in silo, and should engage with the auditing professionals on matters other than disciplinary proceedings.

Proper accountability

It is understood that one of the most important objectives of the regulator is to monitor the profession by conducting enquiries, inspections and investigations. However, it is equally important for the regulator to guide the profession toward smooth functioning. There is much experience and expertise available with Indian auditing professionals, which the regulator can use to its advantage.

Another issue taking centre-stage is the resignation of auditors. When an auditor wants to walk away from an audit due to reasons which are clearly spelt out, no one comes to his defence. On the contrary, in a double whammy, companies gear up to sue the auditor. Isn’t it time that the MCA and the NFRA regulators also question the auditee company’s management when the auditor resigns?

In our anxiety to focus on fiscal deficits which are measurable, we have given a go by to scrutinising integrity deficit, which is all-pervasive and not just restricted to auditing. Let us start on a fresh and clean slate and try to avoid knee-jerk decisions that can rock the sentiments of the economy as a whole. Let us not pronounce a person guilty until proven innocent, or else, we may find ourselves with a serious problem — a lack of sufficient auditors for the for the over 1.2 million companies (with over 5,400 listed companies) in India.

The writer is a chartered accountant

Published on August 28, 2019

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