Vault Matters | ‘True and Fair’ or ‘True and Correct’: What should be the objective of a statutory audit?

It’s almost impossible to get a ‘true and correct’ view of financials because that would mean the auditor looks into every piece of document in the company.

Whether it was accounting lapses which came to the fore at IndusInd Bank or Gensol Engineering, the first question in everybody’s mind was: what were the statutory auditors doing?

What’s more, the moment something like this breaks out, India’s securities and markets regulator jumps into the ring, along with the newly formed National Financial Reporting Authority (NFRA), Serious Fraud Investigation Office (SFIO), and even the ICAI, the governing body for Chartered Accountants.

It’s not that the ICAI itself does not have checks and balances on statutory auditors such as the peer review. But yet, instances of serious accounting lapses keep cropping up every now and then. Yet, when it comes to taking responsibility, everyone is quick to point the finger at the other person.

Incidentally it’s the silver jubilee of Anniyan, one of the most thought provoking Tamil movies made in this millennium (Aparichit for the Hindi audience). The father of the protagonist tries to pin responsibility on certain officials for the death of his school going daughter. Every official puts the blame on an officer or a department above him and finally the court's verdict is that the whole system should take the blame for his daughter’s death and that is not possible. The father finally accepts that nothing can be changed.

But in the world in business ‘nothing can be changed’ could be a very costly admission to make. Before we get down to finding a solution, let’s take a step back to understand why these lapses occur.

The first step in a statutory audit is taking a ‘Management Representation’ letter. The MR, which forms the bedrock of the audit process and discussions between the auditors and the management to follow for the next 45 to 60 days (if the audit firm is lucky to have so much time in hand, otherwise it’s just about a month), is typically a declaration by the management that company has complied with all the regulations, procedures and statutory requirements.

If it it’s a Big 4 firm involved, a novice article clerk or audit assistant takes this letter from the management and incorporates it as part of the documentation file; it’s very unlikely that (s)he or the signing partner glance through the MR. Therefore, there is no way that the MR is questioned or challenged. From the auditor’s standpoint, there is no reason to, because the objective of statutory audit is to ascertain whether the financials present a ‘true and fair’ view of company, not ‘true and correct’. This is globally the mandate of audit.

To be impartial, it’s almost impossible to get a ‘true and correct’ view of financials because that would mean the auditor looks into every piece of document in the company. Even for a regulator such as the Reserve Bank of India, that is not possible because it would be tantamount to infringing into the business of the bank. But, this again is acceptable if there has just been a one-off lapse in a certain year. When it has occurred over a period of 6 – 7 years, like the case of IndusInd Bank, nobody should be absolved of taking responsibility for lapses.

Which is why the time has come to rethink whether presenting ‘true and fair’ assessment of financials is a good enough target for statutory auditors.

Given the complexity of business and accounting practices, and the growing list of interested stakeholders, particularly for listed companies including banks and unlisted startups waiting to hit the market, it is critical that we reset the objective of statutory audit. It should rise above the customary tick mark with a lilac pen and documents compilation process.

Auditors, particularly the Big 4 and the signing partners, should spend more time for the job they were hired for, rather than making the next business pitch to the client (a frequent compliant from companies engaging large accounting firms). As much as it may sound impossible, it’s time to reset the expectations of a statutory audit.

Presenting a ‘true and fair’ view of financials is not enough anymore. It needs to be ‘true and correct’ for people to take the audit process with utmost seriousness, whether it’s the management, shareholders, regulators and the government.