AUDIT PROFESSION INDIA: CERTAIN ISSUES

The Satyam imbroglio has made several fingers pointed at the sanctity of audit reports in India. Sections 224 to 233 of Companies Act 1956 clearly set out the qualifications, appointment and certain statutory requirements to be complied with auditors of a limited company. The Act thrust upon the responsibility of professionalizing the auditing by stipulating that only a registered member of the Institute of Chartered Accountants of India is eligible to become auditors of companies. The Institute of Chartered Accountant of India (ICAI) is a statutory body incorporated under the Chartered Accountants Act, 1949. The website of ICAI shows the names of the Council who governs the Institute, takes policy decisions, controls, regulates and supervises the auditing operations in India. According to Section 224, the auditor of a company is appointed by the General Body Meeting. Hence the auditors are accountable to the shareholders of the company who constitutes the General Body.

Today’s Economic Times carried a report stating that Price Waterhouse Coopers, statutory auditors of the Satyam Computers pointed out that the audit reports of the company were not signed by their partners (See page 5 of ET). Now the following question arises:

(1) Is it not the responsibility of the auditor appointed by the General Body of a Company as per the provisions of Companies Act 1956 to inform the appointing authority about who all were authorized to conduct the audit and who all were authorized to sign the reports?

(2) The General Body appointed PwC as the statutory auditor and how can they delegate the power of audit to Lovelock and Lewes (Remember the famous maxim “Delgatus Non Protest Delgare” which a delegate cannot delegate his powers to another person).

(3) ICAI who has been empowered as the statutory body as far as accounting and auditing is concerned and Mr. S.Gopalakrishnan one among the disputed signatories of Satyam’s audit report and member of Lovelock and Lewes is a member of the ICAI’s Council. Then how this fact did not come to the notice of ICAI?

(4) In an interview with Mr. Patrick de Cambourg of Mazars (See page 11 of ET), it is stated that though the cash and bank balances are to be independently verified by auditors, often this did not happen and shortcuts were adopted due to complexity of procedures. In this era of technologically enabled banking system, the auditor can even get the username and password of all bank accounts of the company and download the latest account statements directly from the respective banks. Later on the company could change the password. Another statement was that the checking of bank accounts was typically given to the junior accountants. Does this mean that the senior auditors are not responsible for what the juniors do? Is it not the duty of the senior auditors to teach right practices to the auditors?

(5) Another critical issue is that Mr. S.Gopalakrishnan who signed the audit reports of Satyam continues to be a member of the council of ICAI who has to enquire about the audit practices at Satyam. Is it not a conflict of interest? One has to naturally doubt whether ICAI is having a soft approach to the issue because a few days back there was a remark by ICAI President that the auditors could be misled by the company management. Is ICAI trying to protect PwC or Mr.Gopalakrishnan?

(6) Given this conditions how a shareholder can trust the audit reports? The valuations of companies are done based on the audited financial statements and the latest revelation indicates that around hundred odd reports may also face this problem. We are investing in shares looking at the valuation of the company and if the valuation goes wrong our investment decisions also will go wrong. Another important aspect is that the rating agencies also depends heavily on audited financial results and in the above context the rating of instruments and institutions also can go wrong. What would be the solution for this contagious problem?

(7) Now Satyam’s officials are facing prosecution. Why the auditors also are not being booked under the law and subjected to prosecution process. Was there any unholy relationship between the audit staff and the Satyam management?

(8) A few years back in the case of Tata Finance, A.F. Fegusson withdrew its report and the senior partner of Fergusson Mr. Kaley resigned from the position. At that time ICAI had indicated that a review committee would be reviewing the audit reports on a random basis. Did this take place? If so why the Satyam’s report missed from their review process?

(9) The Minister in charge of Corporate Affairs has stated that the company officials could not escape from financial misappropriations by simply remitting the penalty. What about the auditors? Are they also not accountable?

(10) Now the capital market is dwindling and bears dominate the market. A year back, the booming market prompted many investors to put their hard earned money in equity and derivative securities as also mutual funds. Now under the current market condition, many of these investments are considerably below the preliminary investments. The two stimulus packages announced by the government could not instill confidence among investors and many of them are still shy in investing in stock market and related instruments. The confidence in corporate accounting and the audit reports have been lost. It is not that the companies are strong that the investors shy away, but it is the sentiments play high now in the stock market. What would be the measures by the government to bring back the investor confidence?