Not a day passes without reference to fictitious accounts opened for diverting funds either for income tax purposes or laundering of funds. Interestingly, many of these accounts carry the solemn auditor’s fairness opinion on the financial statements. It was a meeting of Chartered Accountants, some of them must be leading, judging by the Toyotas, Hondas or BMWs parked at the gate of the conference. I was in attendance there. Sophisticatedly called “Transfer Pricing” one of the speakers made salient features of various ways of assessing the cost involved between two countries experts’ services, expert fees, boarding, lodging etc. and also casually concluded by mentioning some money to be paid to the tax authority to get the cases cleared. Wow! Since long our Chartered Accountants have become commission agents, a remark jokingly or seriously made by a government official in relation to demonetization drive and Chartered Accountants’ role in India.
This article takes up the role of an auditor in auditing the financial statements, both in India and U S A seriously and brings forth the actual mandates of regulatory authorities. Time to take up the role very serious, particularly, when some of the Chartered Accountants(CAs) had gone to prison and that too for a period of three years without any bail. This is not a joke! Young CAs entering the profession need to read the instructions thoroughly and also repeatedly and follow the guidelines of regulatory authorities clearly before putting their signature on the financial statements as auditors.
Now the precious quotations from the Company Act, 2013 by Dr. Avtar Singh, eminently known as the authority on Company Act whose books have guided thousands of lawyers to lighten up their careers.
I have to quote from this Treatise on Company Law, sixteenth edition, 2015 and published by EBC Publishing(P) Ltd for further discussion:
“Every auditor has to comply with auditing standards…
Now let us look at the responsibilities and functions of the independent Auditor from American regulatory point of view. (I shall express my views on both these standards, as an experienced auditor for guidance purposes at the end)
Let us directly go to the web site of PCAOB, Public Company Accounting Oversee Board as under:
The following information has been directly taken from above web site:
“Public Company Accounting Oversee Board(PCAOB) USA, is a nonprofit corporation established by Congress, USA, to oversee the audits of public companies in USA, in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.
The Sarbanes-Oxley Act of 2002, which created the PCAOB, required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. Previously, the profession was self-regulated.
The five members of the PCAOB Board, including the Chairman, are appointed to staggered five-year terms by the Securities and Exchange Commission, after consultation with the Chair of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury.
The SEC has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget.
The Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, established funding for PCAOB activities, primarily through annual accounting support fees. These fees are assessed on public companies, based on their relative average monthly market capitalization, and on broker-dealers, based on their relative average quarterly tentative net capital.”
The responsibilities and functions of the Independent Auditor as explained under Auditing Standards(AS) 1001from the web site quoted above since it is essential to know the exact language used by regulatory authorities in USA to appreciate comparison with the meaningful Indian explanations given earlier:
“.01 The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. The auditor’s report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with the standards of the PCAOB. These standards require him to state whether, in his opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current period in relation to those of the preceding period.
Distinction Between Responsibilities of Auditor and Management
.02 The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.
.03 The financial statements are management’s responsibility. The auditor’s responsibility is to express an opinion on the financial statements. Management is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, initiate, record, process, and report transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management. The auditor’s knowledge of these matters and internal control is limited to that acquired through the audit. Thus, the fair presentation of financial statements in conformity with generally accepted accounting principles is an implicit and integral part of management’s responsibility. The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management during the performance of the audit. However, the auditor’s responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them.
.04 The professional qualifications required of the independent auditor are those of a person with the education and experience to practice as such. They do not include those of a person trained for or qualified to engage in another profession or occupation. For example, the independent auditor, in observing the taking of a physical inventory, does not purport to act as an appraiser, a valuer, or an expert in materials. Similarly, although the independent auditor is informed in a general manner about matters of commercial law, he does not purport to act in the capacity of a lawyer and may appropriately rely upon the advice of attorneys in all matters of law.
.05 In the observance of the standards of the PCAOB, the independent auditor must exercise his judgment in determining which auditing procedures are necessary in the circumstances to afford a reasonable basis for his opinion. His judgment is required to be the informed judgment of a qualified professional person.
Detection of Fraud
[.06-.09] [Paragraphs deleted.]
Responsibility to the Profession
 [Paragraph deleted.]
11 The auditor should be aware of and consider auditing interpretations applicable to his or her audit. If the auditor does not apply the auditing guidance included in an applicable auditing interpretation, the auditor should be prepared to explain how he or she complied with the provisions of the auditing standard addressed by such auditing guidance.
Note: The term “auditing interpretations,” as used in this paragraph, refers to the publications entitled “Auditing Interpretation” issued by the American Institute of Certified Public Accountants’ Auditing Standards Board as in existence on April 16, 2003, and in effect.”
Let me offer my views on auditing in general which is equally applicable both in USA and India for auditors who undertake their tasks related to giving their opinion on financial statements.Copyright © 2002, American Institute of Certified Public Accountants, Inc.
Simply put, an auditor has to be sceptic, neither excited about successful completion of the audit by framing a very good opinion of the client or diffident about prospects.
Yes, as an experienced banker, an auditor, and later a CPA from U.S.A. I have given many practical examples for readers’ consideration:
Some actual application of above in real life situations:
My mind rolls over an instant happened with me as a senior bank manager and my the then chairman regarding audit of the checking account of his daughter. I had the guts, tenacity or stupidity to write to him about the irregularities and request for removal since his address was given in the account opening form of the account holder. He just called me for a meeting. Most of his personal staff was trembling since my transfer would be certain for having committed the sin of removal of irregularities with the top most man of the bank, however genuine the case may be, in their views.
The actual happening was entirely different and rather, I had a rousing reception from my CMD who happily offered his help to remove the irregularities. Well, you may wonder whether similar senior manager or CMD of banks do exist today? Why not?
But I shall narrate another involving my younger brother who is a brilliant chartered accountant and his experiences with Mr. J R D Tata, the legendary industrialist of our times. Who can forget his unfailing love for professionals and the growth of modern India?
My brother informed me that he raised some audit objections about validating the closing inventory of one of the leading mills of Tata Oil Mills Ltd. I was told that the legendary industrialist not only called him but also agreed with the judgement of my younger brother and appreciated his professional ethics and courage in fulfillment of his duties.
I have met many brilliant bankers/industrialists/Chartered Accountants who travel extra miles to fulfill their legal/professional obligations without fear or favor.
A small audit test for you before concluding the reading of the article:
It was my accidental reading of the plans of income tax authorities to take action against the auditors who could have given their clean audit reports for those Limited Companies who seemed to have indulged in benami transactions and also identified by Income Tax authorities during massive operations taken recently to unearth benami transactions or laundering of ill-gotten wealth. Many of these account holders showed no mercy to the accounting standards or auditing plans evolved over centuries to safeguard all stake holders.
Now is the time to educate our brilliant Chartered Accountants/Cost Accountants/Company Secretaries or other professionals involved in auditing of companies the current rules and regulations of governing authorities of India and U.S.A. I do not think I have done full justice to auditing standards by this article since audit has been in vogue since time immemorial and has evolved immeasurably over time.
Let more brilliant and young auditors take the reins to face the uncertain future with hope and better technology.