Committee of Experts on regulating audit firms and net- works set up by Ministry of Corporate Affairs in response to the issues raised by the Honorable Supreme Court in the judgement of S.Sukumar Vs. Institute of Chartered Accountants of India (February 23, 2018) submitted its report on October 25, 2018. It deals with steps to be taken to strengthen the legal regime of auditors and promote audit as a profession. I am here through this article to express my views on audit profession in India with my vast decades of combined audit experience in India as well as U.S.A.
Committee of Experts on regulating audit firms and net- works report and its consequences
Complete copy of the report was published by Taxguru.in by its article dated 10th November, 2018 and no attempt will be made to explain its detailed features. Any one can easily read the same for detailed analysis.
In a simpleton’s view, auditor was created to deal with the sudden and monumental failure of stock crash in 1939 in U.S.A. by the federal government to give reassurance to all stake holders like investors, suppliers, federal/state authorities dealing with regulatory functions and even to the principal who was raising capital, applied for loan facilities from banks and other creditors. Essentially, the auditor was heavily relied upon for the financial truth of the accounts which were not prepared by him. He clearly stated in his report that the books of accounts and other papers were supplied by M/S——— and were relied upon him to give his opinion. Yes, similar developments in U.K, Europe or Asia set the tone for evolving audit profession and its supervision.
Committee of Experts (COE) deals with market failures which have arisen even after having the accounts of customers duly audited by authorized auditors who were licensed by regulatory authorities.
Legal regimes all over the world have developed a range of tools to deal with market failures.
These legal tools could be broadly classified under the following six categories:
The report has shown the development of supervision over an auditor in India over a period of time.
I am quoting directly the following from the report. My observations on these developments would be given at the end.
2002 High Level Committee on Corporate Audit and Governance
2003 ICAI Study Group Report
2007 Constitution of Quality Review Board (QRB), changes in disciplinary proceedings
2009 Satyam financial fraud CII Task Force on Corporate Governance
2010 Parliamentary Standing Committee on Finance on Companies Bill, 2009
2011 ICAI Study Group Report on operations of MAF
2013 Notification of Companies Act, 2013
2016 Company Law Committee recommends constitution of NFRA
2017 Report of MCA’s Expert Group on Audit Firms
2018 Securities and Exchange Board of India (SEBI) passes order against Price Waterhouse (PW) Supreme Court judgment in S.Sukumar v The Secretary, ICAI
Cabinet approval on setting up NFRA
It took the journey from 2003 to 2018 to implement NFRA by setting up the agency and prepare its constitution. Even now one hears rumbling of ICAI about passing on information to NFRA for its enquiry.
One would like to know whether ICAI is so supreme that it would take for ever to investigate the working of Chartered Accountants working under various functions like licensing, renewal of licenses, providing Continuous Professional Education and initiate disciplinary proceedings against errant members. One would like to know whether obtaining a membership is the end of the professional career and whether a member may collide with borrowers, bankers, anti- social elements or in some cases against anti national elements and work against the basic ethics on which the profession of auditing was formed. Can he corrupt or help fraudsters by using his powers as auditor?
Does the institute take steps to strictly implement peer review of the audit of firms? I do hope, with the separation of big firms from ICAI, it would concentrate on disposing of pending disciplinary cases against its members. Some of the members are not treating its trainees as per the rules and do not even pay the stipends on time.
I have heard cases of trainees facing enormous difficulties in finding the firms to train them, work as mentors or give assignments to learn the rudiments of auditing, taxation or other accounting functions. If a complaint is lodged today against any firm, can ICAI indicate the time frame for its completion?
Do the members have a fear of ICAI for non- cooperation, feeling of punishment which may land up to even cancellation or suspension of licenses or other punishments for activities prohibited by ICAI rules?
One is aware of the poor payments by Public Sector Banks which are inadequate to even pay the trainee CAs to undertake the work of concurrent auditor functions or other types of audits. Recent actions initiated against CA firms for having failed to identify the NPAs provision on timely basis in Statutory audits speak by themselves the irrelevant function of Statutory audits and the way they are conducted.
Now to speak of the audit of big companies by reputed big 4 or other firms, the recent frauds committed on investors, statutory authorities, suppliers or any stake holder of big companies lead us to believe that time has arisen to get NFRA activated and take timely action against giant firms whether located in India or getting their powers from foreign connections who indulgently non-implement the established rules and regulations based on Companies Act, 2013 , instructions issued by ICAI or other statutory organizations.
Can a big 4 audit firm not even verify the cash kept in companies at various places or even verify the fixed deposits kept with themselves or placed with banks at least on real time basis?
I was once talking to some auditors who were leaders in the profession and threw light on the modus operandi in Satyam fraud and the failed audit in that account. I learnt that even total duplicate accounting system was maintained to cheat every one. Recent fraud cases in leading nationalized banks with Nirav Modi and other notorious accounts also indicated that letters issued outside the banking systems were the culprits and bank managers were misled by the letters produced by borrowers.
Have the forensic experts, audit gurus or financial wizards enabled the concerned agencies like ICAI, RBI, banking sector or very big (too big to fail) companies or other financial companies to develop even academic papers which could have been circulated among all to arrive at some solution.
I am finding many regulatory agencies like SEBI, RBI, NFRA, regulatory agencies in insurance, financial services or state governments/central government initiating necessary steps to save all stake holders whose definition does include themselves also.
Senior honest retired bankers/senior retired officials from regulatory agencies, highly respected lawyers, academicians or bureaucrats who have done yeoman service to the nation must visit or be invited by educational institutions to deliver lectures and involve the young to learn the values of ethics and the real benefit of following ethics which was defined as gaining an internal happiness and also doing a good thing as once explained by our former Honorable Prime Minister Morarji Desai, a symbol of Indian purity and emblem of honesty in real life.