ICAI - Unless you act on audit reports, don't blame the auditor
October, 05th 2009
The Institute of Chartered Accountants of India (ICAI), with over 1,50,000 members and 6,00,000 students, is one of the largest accounting bodies in the world. Mandated to regulate the profession of chartered accountants (CAs), the ICAI has been in the news since the auditors of ill-famed Satyam Computers failed to detect the lengthy accounting fraud in there. UTTAM PRAKASH AGARWAL, president ICAI, speaks to Joe C Mathew on the priorities of the institute, post-Satyam. ICAI is in the process of fine-tuning the rules to ensure more transparency and professionalism in the accounting profession. Edited excerpts:
As a professional, how do you see the Satyam scandal? What are the precautionary measures initiated by ICAI to avoid a repeat of like cases? I consider Satyam an exceptional case. It was an intentional fraud carried out by its management. However, it has given professionals, the government and the public at large a platform to discuss the role of CAs, particularly the importance of their independence in handling the accounts. We are discussing how to stop such scandals and we have confidence in our members.
What do you mean by independence to auditors? There has to be a change in the system of appointment of auditors in the company, to give them more independence in functioning. One should look into the current practices of appointing auditors and think of possible changes. It needs lot of debate. There could be a concept of joint auditing, some mechanism should be thought of. It is a great challenge to bring that change.
Are there any models one can emulate? No system is foolproof. International best practices, which we follow, call for more reliance on management. But after Satyam, our members have become more alert. We will follow the best practices, but will be more practical when it comes to verification.
What are the amendments you have suggested in the Companies Bill that is under consideration of a parliamentary panel? In general, about appointments and the independence of auditors. If these independence and transparency problems are resolved, I dont see any further problems. Have you seen any problems with public sector undertakings, where CAG (Comptroller and Auditor-General) is appointing the auditors? Have you seen problems with any Indian banks, where RBI (Reserve Bank of India) is appointing the auditors? There they have independence. RBI appoints us, not the banks.
They decide our remuneration. Bank never decides, RBI decides. We go with full independence and we perform. There I am not under pressure from anybody else, as I dont know the person who has appointed me. I know that I am a CA and am going for audit in the interest of public at large. I think it works the same way in the case of directors. Both directors and auditors should be able to function independently.
What have been your directions to your members to make audits stricter? I am telling our members to rely upon external evidence as compared to the papers/documents produced before them. For instance, if someone produces a fake FDR, which CA is to know what type of FDR has been issued and if it is fake or not? So, they should go for third-party confirmation. People have countered this by asking what if the third party also misleads? My answer is that instead of asking somebody on whom we are reporting, lets listen to somebody else who is an outsider. To that extent, we are more vigilant.
ICAI does not have control over audit firms. It can only take disciplinary action against its members. Is it curtailing your regulatory powers? We have taken a decision after the Satyam case that if there is any disciplinary action or inquiry going against any member, the firms that have engaged those members will also be stopped from taking up fresh government audits. We may not have regulatory powers, but CAG and RBI always ask us before awarding any audit work to clear the list of auditors. Hereafter, we will not clear such cases and will write to them that this is the decision of the council and these firms should not be given the opportunity.
So, you have really gone pro-active? Yes, we have written to (stock market regulator) Sebi also that before appointing any CA for a listed company, that CA firm should undergo peer review and have a peer review certificate issued by the institute. I think they are taking a decision soon. Anyhow, our members are approaching us for peer review, so the response from our members is very good.
Do you blame the auditors for not tracing the fraud in Satyam-like cases? Does the system provide us the power to do something? It is not that chartered accountants are not giving a qualified report. Maybe in lakhs of cases we are giving. How many companies after receiving our qualifying report have not been given loans by banks? How many companies have been closed or directors arrested on the basis of our reports?
You mean to say even if you give a qualified report saying there is something wrong with a company, nothing happens? Yes. Is it that no CA has found any problem with any balance sheet so far? Do we have any example that because of an auditors remark a company has been closed or management has not been allowed to open a new company? Our role is to give a good qualification report, which we do. It is for the regulators to take action, based on the report. Today what happens is, if my member gives (an adverse) a qualified report, the next day the auditor is changed. He loses an opportunity, but what next?
I am not taking sides with the auditor. But if anything goes wrong, immediately people put all the blame on auditors. What about the management? Today, corporate governance is there, independent directors were there, internal auditing is there, and every quarterly report has been submitted to various people, why only the poor auditor is being blamed?