'Rotation of audit firms is a disturbing and costly exercise'
January, 20th 2009
Mazars is an international, integrated and independent firm specialising in audit, accountancy, tax, legal and advisory services, headquartered in France.
The firm has a presence in nearly 50 countries across the world, including India. Mazars Group president Patrick de Cambourg , in New Delhi to attend the CIIs Partnership Summit among other things, spoke to ETs Tina Edwin about the auditors role and auditing practices that could improve the quality of financial statements. Excerpts:
What precautions auditors should exercise when finalising financial statements of a company?
Auditing is a duty of care like that of a medical doctor. A doctor can help cure and save lives, but can also fail. An auditor may not always succeed, he can prevent failures but not all failures. There is no such thing as full audit of a companys financial statements. It would be like having a policeman behind every citizen. Audits operate on the basis of tests. It has to be an economical way of reducing risks and mis-statement of financial statements as well as reducing risks of fraud.
In carrying out the audit, a distinction should be made between a fraud that has significant impact on financial statements and the one that does not. Strong controls are required in businesses that relate to financial markets and trading activities, as a fraud in such instances can be dangerous. Prevention of fraud with limited impact is a function of internal control and overall checking by external auditors.
For instance, forgery by a few employees of the company involving a small amount of money may not have significant impact on the financial statements.
In the case of systematic high level corporate frauds that are obviously significant and have material impact on financial statements, audit procedures should be sound enough to detect them. Declaration of fictitious assets or over-valued assets (as in the case of subprime) on one side and on the other, understatement of liabilities or hidden liabilities have immediate consequences on financial information.
In the case of fictitious assets and hidden liabilities, audit procedure should allow auditors to spot existence of these, unless the evidence in forged (as in the instance of Parmalat). Overstatement of assets and understatement of liabilities could be judgmental error and therefore difficult to detect.
Should not verification of cash and bank balances be easy?
One basic procedure that should be followed in audit procedure is to seek confirmation from the banks that they hold the amount declared by the company in their statement. In theory, verification should be done directly by auditors and auditors should receive answers directly from the bank. But it is a complex process and therefore people take shortcuts sometimes.
Besides, the task of checking of bank accounts is typically given to the junior accountants. Advancement in technology has also made forging of documents a lot more easier.
What are the shortcomings of audit practices in India?
India is not be particularly blamed for deficiencies. There is a tendency in many jurisdictions to consider auditing as a commodity. That is not a good idea. Auditing is a serious matter that should be taken seriously by highly qualified people. Transparency on auditors quality, quality control, and supervision are important. Externally conducted supervision by independent bodies is very important to raise the quality of audit.
In many jurisdictions, peer review is evolving into independent supervision, and we are also moving from self regulation to regulation by government-inspired procedures.
Should then supervision be taken out of ICAI?
In many jurisdictions, the institutes are carrying on certain number of tasks such as education, training, selection, technical evolution, while an external independent body supervise evolution and structuring of the profession. I think such evolution is in the right direction because auditors have nothing to hide, especially from the business community, financial community and the society at large.
It demonstrates that you are up to speed. It is crucial also to be closely related with the international standards of auditing and accounting. Although some aspects of IFRS can be criticised, it is a quality standard and is principle-based.
Should rotation of auditors and joint audits be a norm?
Rotation of key partners is absolutely important but not of the firm. Rotation of the firms is a disturbing and costly exercise, even though it may appear protectionism in some cases. I am a strong supporter of joint auditing. It is an in-built control system even though there is an element of additional cost.
But the cost is less than that of rotation of firms or strong control systems like Sarbanes Oxley Act, (SOX) which has not demonstrated its efficiency.
How can the independence of auditors be ensured without rotation of firms? In our initial market, which contribute about 25% of our activity, we work on the basis of joint audits. We see it as a plus. In the Mazars system, every conclusion of an audit team of a client is challenged by an independent professional from within the firm and disputes can be sent up to a technical committee for resolution.
This reduces the risk of frauds significantly. Besides, at Mazars, for significant clients we have two partners operating in tandem.
We ensure independence by protecting the firm and partners from temptation. At the firm level, we ensure that the fees clients pay is insignificant to the total turnover of the firm. As a rule, no client should be over and above 1% of the total turnover of the firm.
Partners independence is ensured through rotation and the criteria for determining their remuneration. For us , technical criteria are more important than the financial ones.