Time and again authorities and all stakeholders have realized that corporate governance and independent auditors are good terms and concepts to be cherished and for preaching. The recent Satyam -PWC Scam only confirms such a view. There will be such scams in future also. Even today also, there must be many balance sheets window dressed and things may never get exposed. Where are the cases where auditors have independently expressed their views inconvenient to the managements and then have been continued as the auditors in succeeding years? The very fact that the company itself is the appointing authority, may some times make the position of the auditors vulnerable in this competitive materialistic world.
The writer has a solution for the authorities who would like to accept the realities and act to ensure independent qualitative audit beyond doubts. For this, it should be appreciated that the system of audit appointment should be such that the system itself takes care of the independence of the audit report. Such a system should be more or less unfailing under all circumstances and due to involvement of many independent auditors, connivance would be virtually impossible. In such a system, the authority like SEBI should be making the appointments from the panel of auditors and on the basis of auditors’ rankings on objective and well publishised criteria and ensuring that all good firms get audit allotments proportionately and commensurate with their professional standings and sizes.
For such a system, the SEBI can very well take the example and basis of present audit system of 27 the public sector banks of the country and with suitable modifications can create such system of audit appointments and allotments that involvement of auditors in fraudulent connivance would be ruled out. For every listed company, an audit firm should be appointed as a central auditor by the SEBI. The audit of the branches should be done by different firms other than central auditors. Around 5 to 20 branches may be allotted to different auditors independently from the panel for each year and may be continued only for a limited number of years as may be desired and subject to terms and conditions that may be prescribed. Similarly central auditors would also be rotated from the panel. The role of the central auditors should be focused on the audit systems and audit steps. The role of central auditors can be on the lines of those in the public sector banks audits.
All public sector banks like State Bank of India, UBI etc are of giant sizes and the statutory audits thereof are administered on the above lines. They have enormous volume of transactions and numerous branches and some of them have operations across the countries. The system has been working well in respect of independence of auditors in their cases. In their cases, first of all the appointing authority is different than auditee concern itself. Secondly, for every 2 to 7 branches separate branch auditors are appointed. These branch auditors report in the formats designed by the authorities and the central auditors. When so many branch auditors function independently, connivance amongst them and the auditee concern is impossible. Such a system should be formulated by allotting authorities in consultation with ICAI and other stakeholders in respect of all listed companies.
Such a move will remove/ reduce prevailing high degree of disparities amongst chartered accountants. That is needed also as all chartered accountants are equal in qualification. The CA firms on the panel can be ranked based on their knowledge, depth, exposure and other objective criteria as may be determined by the concerned authorities from time to time. Based on past performance, the firm may be continued on the panel and may get allotments commensurate with their capabilities. It is only preliminary that a professional firm should be evaluated and compared primarily on the basis of its knowledge, depth and exposure. Basic infrastructure may be necessary to be on the panel but continuing and widening the disparity simply on the basis of infrastructure like what is happening today is not desirable for the profession itself. Because of this, even some of the most intelligent and high profile chartered accountants may be unable to function on their own.
In fact professional disparity existing on the basis of infrastructure to the extent can be reduced is most desirable also.
Since we know the failing standards of morality in public life, to the extent we can avoid relying upon integrity of people and to the extent we can have preference to rely upon stringent system rather than people, it is better.
It is high time that world over we stop cherishing and speaking something which does not exist. It is high time we stop fooling our own selves that even though the company managements would be appointing auditors, even though they would decide continuation of their appointments, then also all the auditors would function completely independently. It is high time we take steps based on realities and make the auditors independent also for their appointment, remuneration and continuation. It is also better to have rotating auditors over a period of time. It is only on paper that shareholders appoint the auditors as it is known to all of us that ultimately the managements succeed in getting the auditors of their own choice. The scattered shareholders would also prefer that the appointing authority is different than the one proposed by the company managements.
What I have suggested is only a broad frame work of the proposed system and the same can be adopted with suitable modifications. Further, what I have tried to highlight is that apart from relying upon the people to be independent it is more desirable that we create system assuring independence. Further, even if one auditor fails, ultimately the common shareholders and the public funds suffer.
It is well known that even in case of the allotment of bank branch audits this writer had filed and pleaded a writ petition in person at the Bombay High Court and the Hon’ble Bombay High Court had given directions of transparency in audit allotments by the Reserve Bank of India.