Banking and market regulators are considering a proposal authorising auditors to directly verify financial information of their clients with banks where they hold accounts, a person familiar with the situation told.
Currently, rules of the Institute of Chartered Accounts of India require auditors to physically verify the cash and bank balances of companies they audit, and not merely rely on statements provided by the company secretary or the chief financial officer. However, banks are currently under no legal obligation to share such information with auditors.
A key contributor to the Rs 7,000-crore accounting fraud at Satyam Computer was auditors not verifying bank accountstatements and fixed deposit certificates of the company with the respective banks. The IT firm allegedly supplied incorrect information to its auditors about available cash balances by forging the letterhead of one of its banks.
Once the proposed new rules are in place, the Reserve Bank of India and the Securities & Exchange Board of India (Sebi) will make it mandatory for companies to reveal details of their banking arrangements and for banks to share the account details with auditors. It is learnt that Sebi is planning to incorporate this in the listing agreement between companies and stock exchanges.
The issue is likely to come up for discussion at the next meeting of the Sebi Committee on Disclosures & Accounting Standards (SCODA), the person involved in the process.
“Auditors do not have any relationship with banks, nor are banks legally bound to provide information sought by auditors. Broadly speaking, we do not get response from at least 30% of banks. Some companies misuse the system by ‘organising’ information from their banks,” said a person who works with one of the Big Four auditors. But banks claim they are not to blame.
“It’s not that banks don’t cooperate with auditors in this process… Sometimes, banks also seek a confirmatory letter from the company that this information has to be provided. On many occasions, letters seeking confidential information are addressed to the wrong person in the bank. All these practical issues may delay the response sought by the auditor,” said a senior banker with one of the leading private sector banks.
Sebi is likely to take a call after it receives the peer review report as part of which working papers (relating to financial statements) of the Sensex and the Nifty companies will be checked by a committee of auditors chosen by Sebi. Once the peer review report is out, Sebi will look into the areas where more disclosures are required. The auditors’ panel includes Fraser & Ross, MP Chitale, Haribhakti, GM Kapadia and AF Ferguson.
Companies that are subject to the review welcomed the move but said Sebi could make it a part of the listing agreement if it wants them to follow the process regularly. They said Sebi should widen the ambit of the exercise by bringing other firms, especially mid-caps, under the purview of the exercise.