With dual audit, get rid of statutory audit too

Dual audit, the audit by two separate audit firms as a remedy to improve the credibility of statutory audit, is worse than a disease. It is like a Two-Bench Supreme Court Judgement, where both the Judges may disagree with each other, leading to referring the matter to a Third Judge.

The effectiveness of statutory audit is in question since decades, but nothing worthwhile was done to stem the rot. Mandatory rotation of audit firms was attempted several times in the past, but thwarted by vested interests. Independence of auditors or directors cannot be inculcated, but it should be encouraged. Honesty cannot be mandated, but built into the system. Let us underline the point that if an auditor closes his eyes to management’s wrongdoings, he is seldom caught and this is a single factor that encourages dishonest auditors. This is clearly brought out to the fore in the case of Punjab National Bank’s recent fraudulent loans and other nationalised banks’ Loan frauds.

The disciplinary committee of ICAI should not council member of elected office bearer of ICAI. Nomination of council members to ICAI by the Government of India is no better than directors appointed to public sector banks or directors nominated by the banks to borrower companies.

Let us ask some basic questions on the statutory audit? For whom is this audit, why this audit, who are the auditors and how this audit was done? The statutory audit is primarily intended to assure the shareholders, obviously the minority shareholders that statement of accounts reflects a true and fair view. But no one can lose sight of the fact in today’s economy, it is of immense help in assuring lenders like banks, other creditors, tax authorities that what is stated in accounts are reliable. The statutory auditors are de facto appointed by the same management who appoint the internal auditors, as the minority shareholders have virtually no say in the appointment of auditors though the auditors are supposed to assure them on the state of affairs of their company. Further, the statutory audit is a bulk audit planned and executed after a significant time gap, thereby affecting its efficacy and usefulness.

Alternatives: The first one is to discard the Statutory Audit which may sound a revolutionary idea, but it is the best solution to the problem. By discarding the statutory audit, we may have to put in place other checks and balances as a substitute to it like:

1. Shift total responsibility for the true and fair view of accounts and relevant disclosures to the Board, CFO, Chief Internal Auditor, Company Secretary, jointly and severally.

2. Widen and deepen disclosures by including disclosures of internal budget estimates vs actuals with explanations for variations. Privatise tax assessments and Registrar of Companies by handing over clearly defined functions to qualified professionals with overall control with the
government.

3. Evolve a system for the Department of Company Affairs to order a complete and total audit of accounts of any company by a CA firm to be appointed by it after receiving annual reports from companies. This can be done by selecting, say about 20% of the companies in a year using computerised random sampling method. Also, making companies to close accounts every half-year and hold HGMs is a step in right direction.

4. Make mandatory provision in the Companies Act for Right to Information particularly to Shareholders on the Companies Accounting, audit Information, records including inspection, survey, seizure by government authorities.

5. Make it difficult to remove a CFO or Chief Internal Auditor or a Company Secretary by making their resignation or removal subject to Scrutiny/Enquiry by the Department of Company Affairs under the Companies Act. Also, their
emoluments need to be protected.

6. Prescribe stringent punishment to all board members, CFO, CIA, CS for fraud, violations of laws relating to accounts.

7. Making ICAI responsible for developing a suitable Grading System for CA firms and for redefining the Disciplinary Action Mechanism with stringent minimum credible punishment for erring members whether in employment or in practice.

The grading system is essential as under the present Companies Act, a CA qualified yesterday and a CA qualified a decade ago are treated at par for audit of even giants.

Grading CA firms and prescribing audit of companies based on grade of a firm vis-a-vis the net worth and certain other parameters strengthens the audit system. The second alternative is to adopt all the measures outlined under 1-8 above and to continue with the existing statutory audit with a mandatory rotation of audit firm at least once in three years with a rider not to reappoint the same firm at least for the next 10 years. Alas! The law and society can only make it increasingly difficult to people in taking a wrong path and if done to detect it fast but cannot totally prevent wrongdoers from achieving their goals.

(The writer is a Bengaluru-based Chartered Accountant and Consultant)