FE Editorial : Hold to account

The Financial Express
Posted: Thursday, Jan 08, 2009 at 2234 hrs IST
Updated: Thursday, Jan 08, 2009 at 2234 hrs IST

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: The inability or the (collusive) unwillingness of Satyam’s auditors, Price Waterhouse, to ferret out the true financial position of Satyam has raised serious doubts about accounting practices and auditing abilities in India. In fact, a recent study showed that the quality of audit varies significantly, and that there is a lack of adequate quality control arrangements in many of the smaller audit firms. Though the Institute of Chartered Accountants of India (ICAI), the self-regulatory body of the accounting profession, has been making continuous efforts to improve the Indian Accounting Standards (AS) in line with global benchmarks, the efforts seem not to have delivered the required results. A major drawback of the auditing structure in India is that the law fails to recognise the affiliates of audit firms as one single entity. This allows separate legal entities belonging to the same network of firms—and having the same resources and methodologies—to provide different professional services even when there is an apparent conflict of interests. In fact, it was even noted that some banks have violated the spirit of regulations for rotating auditors every four years by ensuring that the incoming auditor was a close affiliate of the incumbent audit firm.

Similarly, the lack of adequate provisions to ensure that there is an adequate cooling off period before audit partners join clients or vice versa is yet another drawback. Less ethical firms use such loopholes to influence auditors and reap unearned rewards. More dangerous are the provisions that allow audit firms to be too dependent on individual corporate clients. The clause that currently allows audit firms to access as much as 40% of their total fees from one single client has to be diluted so that audit firms are not compromised by their need to maximise their revenues. Another major drawback that makes the tasks of the auditing firms more difficult is the policy of allowing the publishing of the unaudited quarterly results even before a limited audited review. Public disclosure of results obviously preempts the space and options available to auditors to correct many anomalies as any leakage of information on major differences between auditors and the management will have serious repercussions on the stocks. The onus is now on the ICAI to take stringent action after the discovery of fraud of this scale. Or else, they risk oblivion with the government stepping in to directly regulate accounting firms. Given the stakes...

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