Auditors can at best blow the whistle after the horse has bolted, but it is for the management to disburse loans after extreme caution
The suspended managing director of Punjab and Maharashtra Cooperative (PMC) Bank, Joy Thomas, has blamed the auditors for the mess at the bank, accusing them of only "superficially auditing" the books of the now-crippled lender due to "time constraints".
To be fair, he also made a mea culpa even while passing the buck to the auditors. It is, however, strange that he should spring to their (auditors’) defence by citing time constraints.
It is true that most auditors do superficial, incremental or shallow auditing. It passes off under the jargon ‘balance sheet audit’. While the correctness of checking only the changes vis-à-vis the previous balance sheet is definitely questionable, time constraints can hardly be cited as justification for doing a slipshod work. There should equally also be emphasis on a fresh look at each and every item in the financial statements.
Thomas also irrationally rationalised the auditor’s less-than-adequate care by saying the business of the bank was growing. That is hilarious. If a client’s size is growing, there is every justification for a fee hike, but none whatsoever for diluting the quality of audit.
If a firm of auditors does not have space as too many clients demand its time at the same point (during the audit season in the run-up to the AGMs), it better not accept so many assignments greedily and hungrily.
Having said that, Thomas is clearly wrong in laying the blame at the door of the auditors who step into the scene much later i.e. often after the horse has bolted, much like the burlesque image of policemen in our movies though the analogy is not entirely on all fours. After all, a bank is not a hotel where night auditors almost do pre-audit so as to prevent an occupant from checking out without paying for all the services he has availed during his stay in the hotel.
The statutory auditor is cast in the role of doing a post mortem. To be sure, during the course of such post-facto exercises, he must blow the whistle for whatever it is worth. But the primary responsibility in a bank’s bread and butter operation -- sanctioning of loans -- is that of the management.
No amount of provisioning for NPAs or cleaning up of balance sheet can be of any help insofar as depositors’ and shareholders’ fortunes are concerned as much as vigilance at the time of sanction of loans. Our PSBs are wallowing in a cesspool of non-performing assets (NPAs), thanks mainly to lackadaisical appraisal of loan applications. While gold loan and home loans stand out as the safest loans from a bank’s perspective, they cannot always serve as the template for industrial loans because the collaterals are often in a state of flux and the borrower’s possession.
Yet, prudence can be exercised. One of them is not putting all eggs in one basket. That, however, is what PMC did by courting disaster -- exposure to the bankrupt HDIL (Housing Development and Infrastructure Ltd), which is stated to be around Rs 6,500 crore or over 73 per cent of its total loan book of Rs 8,880 crore.
RBI norms restrict exposure to a borrower to 15 percent of the loan book. It doesn’t require the auditor to give a wake-up call. The management of PMC should have known all along that the day it put all its eggs in one loan basket, its goose was cooked.
The debate who the primary whistleblower is -- independent directors or auditor -- is as old as the hills, with opinion divided right down the middle. But a moment’s reflection would show that auditing is a leisurely post-event activity though done in haste often. While there is simply no condoning of professional negligence, prevention is possible only by the management, including independent directors.
Ironically however, often it is a rank outsider (Arvind Gupta in the ICICI case who proved to be Chanda Kochhar’s nemesis) or a disgruntled or vigilant employee with conscience (Sherron Watkins, the former Enron accountant) who blew the whistle.S Murlidharan is a chartered accountant and columnist. Views are personal.