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Last Updated : Jul 22, 2019 02:56 PM IST | Source: Moneycontrol.com

Auditors log out: SEBI cracks the whip, but a lot more needed

The scrutiny is on. Auditors can no longer shirk their responsibilities by taking refuge under we-are-watchdogs-not-bloodhounds argument

Moneycontrol Contributor @moneycontrolcom
Representative Image
Representative Image

S Murlidharan

In the political arena, defectors are trying to duck the anti-defection law by resigning. Similarly, in the more rarified corporate world, auditors are resigning from their disagreeable assignments.

This is to duck their responsibilities as the primary whistleblowers and avoid action from authorities for not blowing the whistle on time against marauding company managements.

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Far from blowing the whistle when the gargantuan scam of the order of Rs 91,000 crore took place in IL&FS, its auditors BSR & Associates, part of global accounting firm KPMG’s network in India, had blithely resigned.

This sheepish slinking out is not an isolated instance.

In the past few months, there has been a spate of such resignations triggered by too-hot-to-handle concerns apparently underpinning such resignations. PwC had resigned as the auditor of Reliance Capital and Reliance Home Finance and Deloitte Haskins and Sells LLP had tendered resignation as the auditor of Fortis Healthcare.

It is against this backdrop that the two back-to-back developments have enlivened the corporate world, including that of auditors. First, SEBI’s discussion paper put up for public comments on July 18 assumes enormous significance. The main thrust of the paper is that financial auditors of a company will now not be able to casually resign without finalising the audit report for the full year if they have signed previous quarterly reports.

Besides, the auditors will have to provide proper reason for resignation and would have to state if the company was not sharing proper financial numbers for audit purposes.

The second development is the NCLT permission to the Ministry of Corporate Affairs to prosecute Deloitte and BSR Associates for their failure to detect and report the scams that took place across the now-bankrupt IL&FS group and 21 other entities when they were the auditors of IL&FS Financial Services.

SEBI, which has jurisdiction over listed companies, has rightly stepped in to fill the breach left by the Companies Act 2013 (the Act) which is rather blasé about resignation vis-à-vis removal. All that it says is the new appointment made by the board of directors (which has to be made within 30 days of the resignation) has to be ratified by the general meeting within 3 months of the board’s recommendation.  And that the auditor who has resigned from the company shall file within 30 days from the date of resignation, a statement in the prescribed form with the company and the Registrar indicating the reasons and other facts as may be relevant with regard to the resignation.

But both the Act and SEBI have not gone the full hog. When an auditor is not reappointed as he should be, he is entitled to go public with his grievances by asking the company to circulate his written views, besides getting the right to speak at the meeting where someone else is going to be appointed.

One wonders why the same right to go public is not given to the resigning auditor. Both the Act and SEBI should make good this omission.

Resignation is part of the larger malaise afflicting the auditing profession -- credibility which incidentally also bedevils the rating agencies. Auditors can no longer shrug off their responsibilities by taking shelter under we-are-watchdogs-not-bloodhounds argument.

In his celebrated novel The Final Diagnosis, Arthur Hailey vividly highlights the acute embarrassment of a surgeon -- who has the mortification of his patient dying on the table -- when his pathologist colleague in the hospital at the weekly peer review meeting mercilessly and acerbically attacks him for negligence. In the US as well as many other countries, surgeons are kept on their toes by peer review.

The extant peer review regime put in place by the Institute of Chartered Accountants of India perpetuates the laconic approach to auditing --tick-box, check-box approach -- and thus is an apology of peer review.  But the aggressive peer review with the benefit of hindsight witnessed in the US hospitals has a downside -- it fosters recriminations among professionals and in the long run makes them cling together and gloss over each other’s omissions and commissions with the sobering realisation that it could be their turn to be at the receiving end of it sooner or later.

In that sense ‘dual audit’ could be a better solution -- two sets of auditors poring over accounts independently and pronouncing their opinion to the shareholders separately.  The fear of being exposed by a professional rival without the benefit of hindsight would keep both on their toes.  Of course, it would be more expensive and more disruptive, but nevertheless worth trying at least on a pilot basis.

Unless auditing is made fool-proof, charges against auditors would mount in years to come, to the detriment of the profession which young aspiring CAs would shun just as many a wannabe doctor is shunning the medical profession for the fear of being hauled over coals on possible charges of medical negligence and mindless mob reprisals.

The author is a chartered accountant and columnist. Views are personal.

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First Published on Jul 22, 2019 02:56 pm
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