Shaken by the alleged “inaction” of Satyam Computer’s auditor Price Waterhouse, the Institute of Chartered Accountants of India is planning to push for a cap on the tenure of a company’s auditor.
The institute is also looking into the possibility of issuing guidance to its members on “compulsory verification” if a company’s cash and bank balances exceed a “certain threshold”.
Reportedly, Price Waterhouse has been associated with Satyam as an auditor for eight years. While long association helps an auditor know a company inside out, it could also lead to a quid pro quo kind of situation.
Indian companies, some of which are also listed overseas, invariably end up appointing one of the Big Four global accounting firms as auditors, as they are well-versed in the accounting procedures and standards in the US, Europe and India. Their appointment usually gets renewed every year and there is no limitation on the tenure for which they can be appointed.
RBI example
“In the light of the recent developments, our central council will examine the issue of limiting the number of years for which an auditor can be associated with a company. In the case of banks, the Reserve Bank of India has stipulated that external auditors have to be changed every three years. In the case of companies too, such a stipulation may be pertinent,” said Mr B.M. Agarwal, Chairman, ICAI-Western India Regional Council.
ICAI is a statutory body established under the Chartered Accountants Act, 1949, for the regulation of chartered accountants.
Auditors are appointed under the Companies Act. The company board proposes the appointment of an auditor and shareholders take a call on ratification of the appointment at the annual general meeting.
“As there is no bar on renewal, the same auditors can continue auditing a company for years on end. The institute, however, has given guidance that the same partners in an audit firm should not sign the balance sheet year after year,” said Mr Agarwal.
Following exaggeration of Satyam’s cash and bank balances to Rs 5,361 crore, as against the actual Rs 321 crore, the balance verification procedure has also come into sharp focus.
“Unless there is reason to doubt, auditors, in good faith, usually accept the banker’s certificate submitted by a company regarding its cash and bank balances. However, following the episode of exaggeration of cash and bank balances, we may issue guidance regarding compulsory verification of cash and bank balances above a certain threshold. This notwithstanding the banker’s certificate,” said Mr Agarwal.
According to Mr Akshay Kumar Gupta, Member, Central Council of ICAI, it is imperative that auditors verify the cash and bank balances, interest accrued on deposits, tax deducted at source and ascertain the source of funds, so that there is no scope for exaggeration of cash and bank balances.
‘Surprising episode’
A senior public sector bank official pointed out that auditors, as a matter of practise, countercheck the cash and bank balances from banks. Inter-firm fund transfers can result in cash and bank balances of a corporate getting bloated. The banker said it was “indeed very surprising” that Satyam’s exceptionally high cash and bank balances escaped the auditor’s attention.
Our Auditors are very clever & well versed in bye-passing the association (any) norms, simply by naming some other audit firm name-sake, but audit done by the same set of people.
One thing may happen is that new appointee who has lent his name as Auditor will be getting some direct or indirect benefits from the present audit firm