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View | Crisis of confidence: Hiring of auditors by management seriously compromises them

View | Crisis of confidence: Hiring of auditors by management seriously compromises them

View | Crisis of confidence: Hiring of auditors by management seriously compromises them
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By S Murlidharan  Apr 4, 2022 6:35:52 PM IST (Published)

Auditing is one profession that has been suffering crisis of confidence for a long time. Shaming them after they have proved to be derelict is not as important as stopping them from cozying up to their benefactors.

The Chartered Accountants, The Cost and Works Accountants and The Company Secretaries (Amendment) Bill 2021 passed by the Lok Sabha mainly targets the first—chartered accountants (CAs) who haven’t acquitted themselves well world over including India. The centerpiece of the amendment is the belated realisation that self-regulation has failed comprehensively across professions.

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Therefore, pack the disciplinary committee of the three professional bodies with outsiders so that they are in the majority and have no axe to grind seems to be the remedy. The assumption, not unfounded, behind this distrust of professionals being judges of their own cause is their clubby and clannish behavior—let me not rock a fellow professional’s boat; who knows tomorrow it might be my turn in the dock. 
But the amendment at best addresses the curative aspect of the problem.  What needs to be addressed with greater urgency is the system of appointment of auditors so that the problem is prevented before it festers calling for cure including punitive action for professional misconduct and deficiency in service. As it is, a firm of auditors of listed companies cannot be appointed by the annual general meeting for more than ten consecutive years.  There has to be a pause thereafter from such self-perpetuation. And such a pause or cooling off period prescribed is five years. This is the gist of the appointment drill.
In the case of government or public sector companies the auditor is not appointed by the management itself—which is the bottom line when he is appointed by the general meeting—but by the Comptroller and Auditor General of India (CAG).  It is this difference in the appointment drill that makes the auditors of public sector companies more independent and fearless.
On the other hand, auditors of private sector companies try to ingratiate themselves to the management so that the gravy train doesn’t stop for longer than necessary—during the cooling off period of five years when some other firm beholden to the first would hold the fort till the return of the original firm.  Don’t bite the hand that feeds is the crux of the issue. If the government is serious about auditors not pulling punches and coming out blazing with exposes of the shenanigans of the management, it must delink their appointment from the management, period.
There is no reason the SEBI should not be mandated with the duty to maintain a panel of auditors and appoint auditors of listed companies from out of such panel thereby ending the cozy relationship that exists between management and auditors. Lifetime appointment invariably turns out to be a sinecure.  Corporate literature is replete with sagas of mutual back-scratching tendencies working to the detriment of shareholders and government.
Dual audit is something that can heighten the effectiveness of the audit exercise manifold. Human behavior is to be more vigilant and bring in greater devotion to the job when one knows that someone else is snapping at his heels. Peer review started in the US hospitals precisely for this reason.  In the weekly peer meetings, surgeons who have had the mortification of seeing their patients die on the operating table or soon thereafter are grilled mercilessly by other doctors. While the surgeon at the receiving end often resents barbed comments based on hindsight, the truth is he tends to be on guard when he scrubs and gloves.
Auditing being largely a postmortem exercise, an erring auditor simply cannot be heard to complain against hindsight.  He has to be on his toes, period.  And to keep each other on toes, there should be a regime of dual audit so that the shareholders and authorities have access to two reports from two auditors.  The one who has been remiss in his duties would be exposed by the one who has been more painstaking.  If this jacks up the cost of auditing, so be it. Pitting one CA against another in other words could be a healthy practice with complacency taking the back seat.
Coming back to the amendment bills, packing the disciplinary committee of the ICAI for example with disinterested non-members might superficially appear to be a good move but they can be relied upon only as much as a jury can be relied upon to give a flawless judgement devoid of prejudice, ignorance and emotion.  At any rate, this alone cannot ensure more diligent and conscientious audit work. Be that as it may.
For too long the tribe of auditors have been cossetted with the wooly and self-serving helpline offered by the House of Lords in the Kingston Cotton Mills case of the yore—auditors are watchdogs and not bloodhounds.  The Companies Act 2013 has done well to end this lulling notion by making auditors accountable to all the stakeholders including those who reposed faith in their audit reports. And it has also done well to cast him in the role of the primary whistleblower.
An auditor who doesn’t bestir to exercise due diligence of course needs to be named and shamed as indeed it happened in the infamous Satyam scam of 2008 when the Ivy league auditing firm blithely accepted the forged fixed deposit receipts of banks without asking for confirmation from the bank. But then prevention any day is better than cure. The gangotri of auditing malaise, appointment, must be cleansed first.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
Read his other columns here
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