Watching the watchmen

| Updated on June 13, 2019

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Stern action is warranted in cases where auditor negligence is proved

The repercussion of the move by the Ministry of Corporate Affairs, seeking the barring of Deloitte Haskin and Sells and BSR Associates from auditing for five years, is already being felt. Another leading audit firm, Price Waterhouse & Co, has resigned as the statutory auditor of Reliance Capital and Reliance Home Finance, due to unsatisfactory response to queries raised while auditing. While that is the ostensible reason, the threat held out by the MCA’s application in the IL&FS Financial Services case, that serious steps could be taken if auditors were seen negligent in their duties, could also have spurred PwC’s decision. The MCA is justified in asking for stern action against the two leading auditors in the IFIN case as the Serious Fraud and Investigation Office’s investigations, as outlined in the charge-sheet, have revealed serious lapses in the manner in which the audit was conducted between FY14 and FY18. Auditors were found to have colluded with the management to fraudulently falsify the financial statements that resulted in presenting a healthy state of finances of the group to external stakeholders.

Such instances of the auditors failing to be independent while carrying out their duties is not new and has been a perennial problem over the years, not just in India, but globally too. With audit fees being paid out of a company’s profits, their allegiance has often tilted towards the management, rather than the shareholders, to whom the audit report is addressed. This is however unacceptable as lack of independence among auditors erodes the very credibility of financial markets as the information on which the valuations are based then becomes doubtful. The interests of all stakeholders of a company — investors, lenders, operational creditors — are compromised if the audited financial statements are not trustworthy. However, there is some light at the end of tunnel. With the action taken against the auditors of Satyam Computers by SEBI in early 2018 there has been a change in the conduct of auditors. There have been a slew of auditor exits from companies such as Vakrangee, Atlanta and Manpasand Beverages in the recent past citing insufficient documentary evidence to support expenses and revenue or non-disclosure of material information by the management. Stringent action against auditors in the IFIN case will further help improve intolerance towards accounting lapses.

The ongoing issues highlight the need for better internal and external checks in audit firms. Internal committees, preferably comprising external members, are needed to ensure that firms do not compromise on ethical practices in order to garner business. Self-regulation by the Institute of Chartered Accountants of India has often been found wanting in the past. The setting up of the new independent regulator for the audit profession — the National Financial Reporting Authority (NFRA) — will help strengthen regulatory oversight. The Centre should, however, ensure that enough resources are provided to the NFRA to enable it to fulfil its role effectively.

Published on June 13, 2019

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