Auditors to soon ring alarm bell on income risks of cos
November, 27th 2008
Auditors will soon have to warn investors of potential risks to companies future income in addition to certifying accounts and
signing off on a firms financial health, as the government looks to put in place an early warning system to help shareholders.
Although such a function is being performed to a limited extent by ratings agencies, the government is keen to ensure that auditors also help to identify risks in a companys business, especially at a time firms have suffered losses because of their exposure to highly complex financial instruments, government officials say.
Statutory auditors, at present, do not have to qualify their audit reports with their findings on potential risk areas that would affect future revenues. They should be vested with that responsibility, said an official in the ministry of corporate affairs, the nodal agency for administering company law as well as accounting and auditing norms.
The ministry will soon ask the accounting rules maker, the Institute of Chartered Accountants of India, to carry out the necessary changes in the guidance it gives out to auditors.
The official said the government has also examined the role of directors on the boards and believes they should have been more inquisitive about the operations of the company, especially if corporate treasury departments invest in complex derivatives to boost profits. However, the primary responsibility of warning shareholders about the risks must rest with the auditors.
The world over and in India, companies have in the past few years increasingly traded in exotic financial instruments designed by clever mathematicians as part of their regular treasury operations, but directors on boards havent fully grasped the risks from such trading.
Directors on the board should not remain in the company without understanding the risks involved in any area of the companys operations. They should ask as many dumb questions as needed to be fully satisfied of the risks.
Then they could take an informed call on whether to take that risk or not, said Dominique Vincenti, the chief of a global association of internal auditors called the Institute of Internal Auditors.