Earlier, this department was considered as an "extension" of the finance function, and its role was primarily related to the "red and green" ink syndrome. Thereafter, it was spun off from the finance function, and put under the CEO. Consequently, its role enlarged significantly and it became a "power centre". In fact, it was perceived as a "springboard" for climbing up the hierarchy.

Apart from traditional auditing, the department's role was to ensure that the various departments function as per the procedures and systems laid down, and that there is uniformity. Its reports and recommendations were submitted directly to the CEO.

The latest development in the field is to assign internal auditing to external professional firms of chartered accountants. The advantages are many-unbiased reporting of findings and recommendations, experience and knowledge in conducting similar assignments, thereby bringing in industry experience, etc. The reports and findings are periodically discussed at the corporate level.

While all this is about the past, the future will see a paradigm shift vis-a-vis the role, responsibilities and importance of auditing, which can be looked at from three angles. First, the developments taking place in the Internet and e-commerce era will have a cascading effect on all spheres.

While a substantial part of the business will take place through the laptop, they will soon be replaced by mobile phones. Also, in a B2B situation, physical location is no longer a constraint-a manufacturer is located in one part of the globe, the trade transaction takes place in another part, the delivery is done at the third place, and synchronisation of the transactions takes place at the central hub. In almost all such deal, credit cards/debit advices will be the mode of payment.

In such a "borderless" situation, the only variant is the "quality" of service provided to the customers-the product, its usefulness, its specifications, speed in responding to the enquiry, coordination between the manufacturing location and the franchisee located close to the proximity of the customer, other logistical agents like transport, courier agency, etc.

All this will call for substantial decentralised and speedy decision- making. However, what is necessary is to ensure that in the process, all laid down procedures and systems are not flouted or circumvented and that there is uniformity in policies among all departments. Here the role of internal auditor becomes crucial.

Second, on the corporate governance front, the internal auditor will be required to wear many hats. The constitution and effective functioning of an audit committee, consisting of at least three independent directors, is integral to corporate governance. This is now an "attendant requirement" for listing in global stock exchanges. The report of the Sebi committee on corporate governance (headed by Kumar Mangalam Birla) rightly says that "a system of good corporate governance promotes relationships of accountability between the principal actors of sound financial reporting-the Board, the management and the auditor. It holds the management accountable to the Board and the Board accountable to the shareholders. The audit committee's role flows directly from the board's oversight function. It acts as a catalyst for effective financial reporting."

In the recently brought out Companies Act (Second Amendment) Bill 1999, a new Section 292A has been enacted whereby every listed company having a paid-up capital of at least Rs 5 crore has to constitute an audit committee.

In the foreseeable future, there will be a sea-change vis-a-vis the constitution of the boards, the requirement of information to be put to the board, the way board meetings are conducted, and the level and involvement of the board in the affairs of the company. The boards, which were once perceived as "long shadows of the chairman" will be replaced by independent non-executive directors who are professionals. Transparency will be the "in" thing.

By acting as the coordinator of the audit committee, the internal auditor would ensure that all provisions of corporate governance are complied with.

He will also have the responsibility to be a "conduit" between the board and the management by way of provision of all information. This issue is more important as, in the foreseeable future shareholder activism will gain momentum. Hence, internal auditors cannot take shareholders for granted. At another end of the spectrum, they would be required to relay warning signals to the board regarding non-compliance or substantial under-performance vis-a-vis the targets set. The findings of the audit committee will form a part of the annual report.

The third aspect relates to the plethora of mergers, acquisitions and tieups taking place in India and abroad (which will have an impact on their Indian subsidiaries). This development would involve merger of two companies (or tieup) which are following different systems and procedures. Internal audit, therefore, will have to play a pivotal role in formulating a common set of systems for the merged entity.

Having dealt with some of the portents for the future, the most important questions are: how do internal auditors cope with the challenges ahead? What are the "attendant requirements" for operating in a changed scenario etc.

Apart from a thorough knowledge of information technology, internal auditors will have to be familiar with international accounting standards like US GAAP as also corporate mergers, acquisitions, etc.

Since India will soon be entering the patent regime, knowledge of patent laws, TRIPS, etc. as also procedural requirements of international stock exchanges like NASDAQ, New York Stock Exchange, etc. would be an added qualification for future auditors. However, the most important development would be the infusion of specialisation in this department. In other words, there would be auditors with specialisation in areas likes systems audit, CAPEX project evaluation, corporate governance, cost-efficiency, foreign exchange risk management, mergers and acquisitions, patent laws, registration of international stock exchanges, etc.

The day is not far when companies will start appointing auditors who are specialists in their area of business. Hence, the need of the hour for the auditing firms in India is to identify areas of "core competence" and strengthen them by way of induction of specialists from abroad (if the required expertise is not available in India) or by tying up with firms abroad.

(The writer works with the office of Ajay G Piramal, chairman, Piramal Enterprises Ltd, Mumbai)