The battle between the statutory auditor, the shareholders, the governance and ethics committee, the government authorities and hefty fees, is a never-ending one. The government’s response of band-aiding the issue does not stop the puss from growing in the already infected relationship.
The duty and responsibility of the statutory auditor is to report on the (a) going concern, (b) true and fair nature of accounts and follow a whole set of accounting and auditing standards that are still ever evolving. The statutory auditor also has to comment on policies, processes, controls, risks, etc. This is done within the ambit of statutes that these virtual entity are covered with. These statutes could be financial, as well as, non-financial. For abundant caution, the Company Secretary is also roped in to ‘certify’ the veracity of the compliance and regulations that this entity has to follow. Then there are oversights boards, starting with the Institute of Chartered Accountants, the parent body, NFRA (National Financial Reporting Authority), SEBI and MCA. Various reports, like, the Kotak report on Governance also sets some parameters, especially regarding related party transactions.
The unveiling of frauds adds to more insecurity and doubts on the integrity of the auditor. Then the clamour by the minority stakeholders to delink fees and appointment adds to the confusion.
The Statutory Auditor is appointed by the Board, approved by the AGM (shareholders) and report to the Audit Committee. The reporting is ‘supposed to be’ transparent. The recent unveiling of frauds where the statutory auditor were a global and process driven firm of auditors, has forced the oversight bodies to increase the reporting areas.
SFIO (Serious Fraud Investigation Office) has become very active. The latest is ILFS where they have stated in their report “The firm did not audit IL&FS books with due care and professional skepticism. The probe has revealed that the auditors have failed to perform the duties as mandated under The Companies Act,” And they were auditors for ten years and with an average annual fees of Rs.200 million (Rs. 20 Crores).
The Institute of Chartered Accountants of India (ICAI), which regulates the financial auditing profession in India, has framed a new standard called Key Audit Matters, KAM (SA 701), which would be effective for audits of financial statements for periods beginning on or after April 1, 2018. KAM makes it mandatory for auditors to explain the rationale for their decisions in the audit reports. From stating an opinion, the statutory auditor now needs to record the basis of his decision.
As if this is not enough, SEBI last month came out with a guideline on group audit. This will make the statutory auditor even more accountable while preparing audit report, mandating them to undertake a limited review of all entities accounts, which are consolidated with the listed entity. This is effective from 1st April 2019 and is in line with the Kotak report on governance. This will help where the off balance sheet transactions take place in the subsidiaries while keeping the parent company’s book’s clean. This will lead to uniformity in reporting and following the accounting standards and transparency.
Unfortunately, as has been stated by us earlier also, the detection of fraud is never through the audit reports, but always through the whistle blower, even in the ILFS case the SFIO was directed to the ‘compromise’ by an internal team member of the Statutory Auditor.
Will adding to the reporting improve the quality? Ethics and reporting, unfortunately, are two different spheres, unless there is a morally driven professional, this will be difficult to change. Compromising fees and ethics, and standing by professional guideline, is a tight rope, no one is seeing walking. We are professionals need to set an example that will be followed by the industry.
