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market | IST

Experts call for stern measures to address audit failures, increase credibility

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Industry experts have suggested various steps to strengthen the credibility of this institution which has a crucial role to play as a watchdog for the investors of listed companies.

A series of events from Manpasand Beverages to IL&FS, and now even Reliance Capital, have brought the responsibilities of an auditor to the fore.
Talking to CNBC-TV18, industry experts have suggested various steps to strengthen the credibility of this institution which has a crucial role to play as a watchdog for the investors of listed companies.
The panel of experts included Dinesh Kanabar, Founder & CEO of Dhruva Advisors, TV Mohandas Pai, Chairman of Aarin Capital, Amarjit Chopra, former president of ICAI, and Sudhir Soni, National Assurance Leader of SR Batliboi.
Dinesh Kanabar, Founder and CEO, Dhruva Advisors
I don’t think we are in a crisis situation. We had firms of chartered accountants doing audits of listed companies, and historically, India probably had very small proportion of Big Four doing listed companies compared to anywhere in the world. Globally, if you see the listed companies, more than 90 if not 100 percent of the companies are really audited by the Big Four.
In India we had a situation where many small firms continue to work with their audit clients. Then came the rotation and the rotation actually saw what was unintended. The Big Four started to get more and more audits and their domain of audit practice increased. We have then seen a series of situations where people have not agreed with the audit companies on the principles that they followed and that has led to a firm stepping down and resigning. Earlier they could do so without assigning reasons, now they are required to give reasons.
Today we have issues such as IL&FS which are still under investigation. It is not necessarily an Indian issue. If you look at the UK or the US, there are
so-called audit failures and they need to be addressed and there are answers to be found out, not necessarily only in India but also globally.
TV Mohandas Pai, Chairman, Aarin Capital
I don’t think we could have averted this situation till the crisis blew up because this kind of crisis is not permanent and will happen from time to time. Audit failure is going to happen in future also because management and auditors get too close. Look at IL&FS - they were part of the same cosy club, they got consulting money, they got tax money, they helped them restructure, there were deep conflicts of interest, their balance sheet was totally bad and the auditors did not qualify, did not look at it. There is collusion. The key is how we respond to it. Do we appropriately punish the firm to make sure it does not happen again?
In India, Sebi panned PWC and PWC pulled up its socks. The key thing is how do regulators react, how do they bring them in line and more than that how do the Institute of Chartered Accountants (ICAI) pull up these people. The ICAI has to take a blame too because behind the curve they are working with a 19th century architecture. This is a 21st century. All over the world, the disciplinary part of the profession is being handled by independent bodies, the accounting standards are set by independent bodies. Now everything is in one body and it is not working. They take too much time. They are not proactive enough. So I think it depends on how we handle this.
Amarjit Chopra, former president of ICAI
For the last one decade, it is the auditing profession which has been taking the entire flack. Unfortunately, people are not talking about the promoters, they are not talking about the directors, they are not talking about the bankers, rating agencies or the role of the RBI. I don’t want to get into those kind of debate but definitely one thing is sure -- if I look at the various advances or loans which have been given by the banks today I can tell you there are cases where the banks have advanced loans where actually the sales were going down for the last five years.
We brought it out in the long form audit reports and the RBI remained silent on those issues. I will not absolve ICAI of the entire blame, there have been a certain number of years where we did not progress in the disciplinary matters but there have been certain very good years where the progress has been made tremendously in the disciplinary cases.
Sudhir Soni, National Assurance Leader, SR Batliboi
There is enhanced responsibility and the expectation gap that needs to be bridged if the profession has to stay relevant. The standards have to be upgraded and the best part is we today have the tools and the technology to do more penetrative audits and I think we should do that. At the same time, I must caution that we cannot become bloodhounds on every audit. Then no audit will get done and you will also need time of response and so on.  I think that will be counterproductive and there has to be an element of balance in that expectation.