Satyam Computer Services CFO Vadlamani Srinivas admission that the companys auditors were not complicit in the Rs 7,000-crore fraud should provide Price Waterhouse and its two partners some reprieve. Yet, that does not mean they should be absolved of the charge of negligence in exercising oversight on the companys financial statements. It appears the auditors did not physically verify bank statements provided by the company with the banks concerned.
Reports suggest the auditors relied on the statements provided by the cost accountant of the company, and communication between the auditors and banks were through the Raju brothers. That is an unacceptable practice. Confirming the veracity of bank statements independently is one of the basic tests auditors are expected to undertake.
And, undoubtedly, it is one of the easiest tests. Where such negligence of duty is seen, it should ideally be dealt with disciplinary action by the regulators, rather than with criminal proceedings. More importantly, internal check systems of the audit firms which could include review of the work of one partner by another should ensure high quality of audit. To the extent the auditors have carried out due diligence to the best of their ability and with integrity, they should not have much to worry about.
The quality of regulation is an important determinant of the quality of professional service rendered. While the ICAI moved with alacrity to inquire into the Satyam forgery case, its track record of disciplinary action on errant members does not inspire confidence. The crisis of confidence facing the profession, post-Satyam, did serve to jolt the professionals and regulators to take remedial action.
Auditors are reported to have become more cautious with verification of documents. That is indeed welcome. However, excess caution should not delay in finalisation of accounts and raise cost of auditing substantially. This must be avoided. Peer review of audits is set to become a norm. But that alone is not enough. Joint audits for companies that cross a certain threshold of revenues must be introduced.