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Audit firms in for a medical checkup

There have been failures in delivery. True, the extent of failure depends on which side of the fence you are sitting. What was once a profession has turned into a business. And it does not command the respect it once did.

There are many reasons for this.

Chief among these is the spectacular failure of companies that received a clean bill of health from auditors. Every now and then, the regulator wakes to check if the screws can be tightened on the auditor, who is, of course, a soft target.

The other concern is that today, in law, the shareholders appoint the statutory auditor. In classical governance theory, which talks of the principal-agency relationship of the shareholders and the management, this style of appointment is perfect. But, in reality, the administration appoints, with a perfunctory acceptance by shareholders. And there begins the crisis. Forgive my inappropriate language, but you cannot allow the suspect to decide who will be the cop.

Some alternatives are, I guess, being explored. Like, a centralised agency that would allot audits. It could be the C&AG, for instance. But knowing how a lot of soliciting takes place, one may wonder if this would work. Do not get me wrong. Auditors are no bigger rogues than failed doctors. But it is essential that a severe ailment such as ‘trust deficit’ is not treated with Band-Aid. A numerical scoring system for selection can be an option.

Another alternative could be to ban those who do the statutory audit from doing other work for the client. Remember, such additional work is immensely lucrative and can act as a carrot for getting a clean chit on audit engagements. Most firms may indeed have a Chinese wall between the two functions of audit and consulting, but perceptions matter. A couple of the audit Big-4, DHS PwC and GT have done the right thing in making a start on this. They have chosen not to take up non-audit work in companies where they are the statutory auditors. But my sense is that it should be a blanket ban of ‘any other work’ since there can be interpretational issues on what is audit-work and what is non-audit work.

There is a fear in the profession…

In the last couple of years, unheard of things started to happen. Auditors stepped out of audit engagements after having accepted and commenced work. It raised doubts as to what were they doing all these years. And then IL&FS descended on us. The jury is still out on whether it was a case of business loss or of an adverse audit or both. In many companies that tanked, auditors flagged issues after the horse had bolted. On their side, different people on different matters now judge the auditor: SBI, RBI, MCA, SFIO, NFRA, ICAI; that’s the list of people who govern the profession in some way or the other. Can you answer six men in a boat?

A third step could be in laying down minimum norms for being eligible to carry out audits of listed companies. An analysis done by an organisation with which I am associated showed that in the universe of listed companies, several audit firms were auditing only one listed company. This can make an auditor susceptible to management tantrums.

My own take is that there is a severe expectation gap. Both by law and by training, auditors, do not walk into a company assuming that there are frauds. Yet the public thinks it is so. It is essential that the government mandating a forensic audit, once in three years, initially for the NSE 50 and later for other companies. This will help the statutory auditor work with a lot more comfort. In the long term, medium-size firms that want to do an audit of listed companies must merge and scale-up, such that we have just about 25 firms doing these stat audits. Others could handle small and medium enterprises or be pure consulting players.

Let’s wait and watch.

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