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Should audit firms be banned for auditor negligence?
May, 13th 2010

Accounting Firm Scanning

It has the powers to suspend an auditor, but now ICAI, the Institute of Chartered Accountants of India wants the power to suspend entire firms. This proposal is part of ICAIs recommendations for better regulation of the audit profession.

Here exactly is what the ICAI is asking for: "seek amendment in the Chartered Accountants act, regulations and rules to proceed against the firm, including imposition of ban, where the partners and the members of an audit team are found to be guilty of gross negligence/fraudulent activities

Now this suggestion has the audit community up in arms! Is it fair to disbar a firm for the failure of a few individuals? Isha dalal has auditors thinking aloud
 
YH Malegam, Chairman Emeritus, SB Billimoria & Co

In the present context, when firms are very large, it is always possible that someone within the firm may be negligent. So I think its totally wrong to say that because an individual in a firm is negligent, therefore the whole firm should be debarred from practice or be suspended.

Nawshir Mirza, Former Partner, EY

Audit is a team effort-beyond a team effort. It means the firm must have in place proper processes, proper knowledge management so that people doing the audit do it in a comprehensive and dependable manner and use information and knowledge relevant to that assignment. So its a huge amount of activity done as part of the firm. So rightly, I think, if there is a charge of negligence, it should lie at the door of the firm.

YH Malegam, Chairman Emeritus, SB Billimoria & Co

As far as the firm is concerned, the firm has entered into an agreement to carry out an audit and it acts through various persons within the organization. But let us suppose you have a company and you enter into a contract and an individual commits a fault is negligent, do you debar the company from doing any more work in the future?

Nawshir Mirza, Former Partner, EY

When people go out and appoint a firm, they look at the name and reputation of the firm. They dont even know which partner will be sent out to do the audit or which member of the team will be sent. So if shareholders and boards of directors select a firm, they are selecting the firm. So the firm is first of all perceived as the entity doing the audit.

Viraf Mehta, Partner, Kalyaniwalla & Mistry

The firm should not abdicate itself from the responsibility and it cannot. The firm has to take responsibility for the work being done in the name of the firm. But like I said, whether banning is the solution to this is the question

Vishesh Chandiok, Managing Partner, Grant Thornton

I dont think just because one audit team did not follow the guidelines, colluded with management or overlooked things, should not result in the banning of an audit firm. That would in my book tend to qualify as a situation where the punishment is far harsher than the crime. However if we can prove that the management or majority of the firm was involved in the act, then the option to ban the firm should certainly be available however very, very remotely exercised

Rajendra Chitale, Managing Partner, MP Chitale & Co

On the quantum and sharing there are issues globally as well. There is a movement on whether there should be joint and several liability, of all the members of the audit firm or there should be an alternate to that which is proportionate liability. So the liability is in proportion to the degree of involvement and there is a cap on liability for others. So thats one dimension. We need to be conscious that in India we dont have an LLP structure for audit firms.

Vishesh Chandiok, Managing Partner, Grant Thornton

There are solutions between acting against only the auditor versus banning the entire firm. And there could be sanctions like the inability to accept clients for a certain time, the inability to audit certain businesses and similar intermediate solutions. I think banning is one extreme and not being able to act against firms is another extreme and I think we need to find that balance somewhere.

Rajendra Chitale, Managing Partner, MP Chitale & Co

Globally, there is a regime of licensing firms and there is an ability with independent regulators to put sanctions on the firm in terms of suspending its right to do audit. So such powers do exist in the US and the UK, but the key point where they are themselves grappling with a bigger issue is that there is so much concentration of work across the Big 4 that any further reduction of the number below 4 on account of suspension of any one is a big systemic risk that they dont know how to handle. So its a much more complex issue globally and in India. So one cant answer as a cut and dry yes or no.

YH Malegam, Chairman Emeritus, SB Billimoria & Co

What sort of disciplinary action can you take against a firm? After all, ICAI has a peer review process. It examines the firms. Let us assume it has cleared the firm through the peer review process and then an individual in a firm is negligent. Then how would you take action against a firm that you have yourself cleared as being competent to do the work?

Viraf Mehta, Partner, Kalyaniwalla & Mistry

And even beyond that, the action for banning has to be done by the High Court. So the institute does not have the power effectively even today to ban the member, because the member has the right to appeal to High Court.

So first maybe they need conclusive powers to ban a member, before ICAI chases firms. Some accountants say this proposal reeks of anti-Big 4 sentiment. But that could be because in this very same set of recommendations, ICAI has also suggested further scrutiny of foreign affiliated accounting firms in India. 

By the way that ICAI report  on matters arising out of the Satyam fiasco is still awaiting finalization. At least, that's ICAI told us when we approached them for comment. The final report will be submitted to the ministry later this month.

 
 
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