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Auditing the auditor: NFRA is fine, but more steps needed

The government would do well to usher in auditing reforms

December 16, 2019 / 03:48 PM IST

S Murlidharan

Auditors are in the line of fire for their past deeds. Gone are the days when they could get away with their audit, no matter how shoddy it might be.

The Satyam scandal proved to be a test case. Auditor PwC (Pricewaterhouse Coopers) found itself on a sticky pitch as SEBI handed a two-year ban. It’s a different matter that the Securities Appellate Tribunal (SAT) faulted the judgment on the issue of jurisdiction and instead asked the Institute of Chartered Accountants of India (ICAI) to take a call.

The ICAI, however, chose not to rock the boat -- all that it did was to cancel the membership of the erring entities, besides imposing a maximum penalty of Rs 5 lakh on them.

But more importantly, the message went out that auditors now can’t have it easy.

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Cut to December 2019. In the first audit quality review, the regulatory body National Financial Reporting Authority (NFRA) found multiple gaps in Deloitte Haskins and Sells’ audit of IL&FS Financial Services (IFIN). The NBFC was solely responsible for the crisis that followed, sparked by a liquidity crunch because of a series of payment defaults.

In a sense, the NFRA held a mirror to Deloitte, and in the process, to the whole bunch of auditors. The alleged lapses included perfunctory audit, non-adherence to auditing standards, conflict of interest by rendering non-audit services at high fees and lack of sufficient professional scepticism.

For too long, auditors had taken refuge under the line that “we-are-watchdogs-not-bloodhounds”, which owes its origin to the protection the House of Lords offered them in the Kingston Cotton Mills case.  However, the tide turned when the Companies Act, 2013, made the auditors the prime whistleblowers. Now, the NFRA has lent its weight to the Parliament’s move of naming and shaming delinquent auditors.  But more needs to be done.

It all starts with the appointment of an auditor. Rotation of auditors mandated by the Act is certainly an improvement over the earlier practice that allowed once-an-auditor-always-the auditor audacity. That had made auditors pliable and dance to the tune of promoters.

There are other faultlines as well. Still, it is the promoters who handpick their auditors, unlike public sector companies where the CAG (Comptroller and Auditor General) plays a key role with a panel of auditors in place.

Similarly, for listed companies, SEBI should be mandated to pick auditors from a list of candidates drawn up by it.

Second, the statutory auditor should not be allowed to double up as an I-T or management consultant as it compromises his role in auditing.  All auditing and consultancy services under one roof is simply not encouraged alongside financial audit of accounts.

The NFRA has only set the ball rolling. Is the government taking note to usher in auditing reforms?

S Murlidharan is a chartered accountant and columnist. Views are personal.
Moneycontrol Contributor
first published: Dec 16, 2019 03:48 pm

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