No lessons learnt from Arthur Andersen scandal

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New Delhi: Auditor rotation could have averted Satyam

The role of audit firms may be in the limelight thanks to the involvement of PricewaterhouseCoopers in the massive financial fraud at Satyam Computer Services’, but it is certainly not the first time that the Centre has realised that pliant auditors could trigger damaging repercussions on India Inc’s credibility.

In fact, if some of the key ideas that emerged at the time to rein in auditors and spruce up corporate governance would have been implemented, Satyam’s accounting fraud may have become apparent before its founder and chairman went into confessional mode.

While Satyam is being referred to as India’s Enron, Indian authorities had woken up to the need for stronger regulations for corporate governance, accounting and auditing practices as well as independent directors when Enron’s web of lies became apparent in the United States in 2001. Enron’s case was followed by similar revelations by ‘inflated’ telecom giant Worldcom— both had the same auditor, the now extinct Arthur Andersen.

At that time, the department of company affairs had set up a committee under former Cabinet secretary Naresh Chandra to revisit existing norms for corporate governance and audit firms.

The panel had stressed the need for greater regulation of auditors, including compulsorily rotating audit partners every five years—a move that could have prevented Pricewaterhouse’s undisturbed eight-year stint at Satyam that may have helped Raju pull off his dirty accounting tricks.

Not only did the Centre ignore a large part of the Chandra panel’s recommendations in the Companies Amendment Bill of 2003, but also in the much-touted New Companies Bill of 2008, these thorny issues have been conveniently skipped.

“Although regulatory systems are in place, they need to be tightened further after a careful review,” Naresh Chandra told FE on Tuesday.

Apart from compulsory rotation of partners of firms auditing a company, the expert panel had mooted an annual certification of their independence and setting up of quality review boards to supervise their work.

While some of its other suggestions were included in the Companies (Amendment) Bill, 2003, these were omitted. “The issues were found to be contentious and so it was decided to carry them out at a later date,” an official explained.