Price Waterhouse will defend its role as an auditor of the disgraced Satyam Computer Services, citing the 1986 verdict of the Bombay High Court that said an auditor should not be held responsible for tracking down ingenious and carefully-laid schemes of fraud in a company.
Lawyer’s privy to the development, who requested anonymity, said as per the contract between the auditor and Satyam, the onus of providing accurate information was on the company. “This is a standard across the audit industry,” said a lawyer. The scope of an auditor’s work is different from that of a detective, or of a law enforcement agency, making it difficult to detect orchestrated fraud even if all audit practices are religiously followed, he added.
The 1986 verdict, that came in a case between audit firm AF Ferguson & Company and Tri-Sure India, said auditors must not be made liable for not tracking out ingenious and carefully-laid schemes of fraud when there is nothing to arouse their suspicion, and when these frauds are perpetrated by the tried servants of the company and are undetected for years by directors.
“There is a clear distinction between the work of an auditor and the investigation of a detective. The auditor’s mind is unbiased unlike that of an investigator who approaches work with the presumption that fraud has taken place.
The auditor does a sample checking of invoices and a document after assessing how effective is the internal risk controls in the firm. Based on that, he makes an inference about the authenticity of other similar documents.
This sampling is just a drop in the ocean of invoices and documents that the company produces. Verifying the authenticity of all that material is outside the scope of statutory audit,” explained a senior auditor with a big accounting firm.
“When the auditor stumbles upon something suspicious, he carries out more checks and additional verification, which still falls short of an investigation. That is because an auditor’s job is to give a true and fair view of the company’s financial health and not an ‘accurate’ picture of the same,” he added.
While certifying the financial statements of a company, auditors state that the statements give a “true and fair” picture of the state of affairs in the company, as per the information and explanations given to them. This is far from guaranteeing the accuracy of the financial statements, explained the auditor.
Sebi officials recently told that auditors should accept fewer assignments if they cannot verify all the documents they rely on. The auditing fraternity describes this as an expectation gap.
