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Audit of firms should be outsourced for objectivity
July, 09th 2010

The Institute of Chartered Accountants of India (ICAI) has recommended that the internal audit of companies should be outsourced to maintain objectivity.

The role of internal auditor came under question after the Satyam scam, in which internal auditor V S Prabhakar Rao, a key aide to founder B Ramalinga Raju, assisted the Raju brothers in forging balance sheet of the company.

The accounting regulator has also recommended that the government should make it difficult for companies to remove auditors, which prove to be inconvenient for them.

In the high-powered committee report on Satyam scam, we have proposed that internal audit should be outsourced and not be in house so that there is more independence. If the auditor is from the organisation, it is as good as being an employee of the organisation and the chances of remaining unbiased decline.

Market regulator Sebi through clause 49 and the corporate affairs ministry through the Companies Law should make it mandatory that the internal auditor should be from outside the organisation, ICAI president Amarjit Chopra told The Indian Express.

Internal auditors are charged with providing independent and objective evaluation of a companys financial and operational business activities, including corporate governance. They are entrusted with the task of providing evaluation of operational efficiencies. They also suggest ways to improve the overall structure and practices of the company.

Their role in an organisation has drawn a lot of flak after the Satyam scam, where it was found that the internal auditors were in nexus with the top management in the fudging of accounts. They had overlooked the ERP system failures and did not comply with accounting practices.

Analysts say that there should be a right blend of both outsourcing and in-house auditing.

Outsourcing internal audit work has both pros and cons. By outsourcing the work, a firm can bring in more objectivity and independence along with more experience and expertise from other fields. However, more important is the communication between head the of internal audit and CEO or chairman of audit committee. The success depends more on how freely and directly the internal auditor can discuss the shortcomings in a firm with the CEO of audit committee, said KPMG director Ganesh Ramamurthy.

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