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.
While ruling out compulsory rotation of audit firms, the Chandra committee had suggested that the partners and at least 50% of the engagement team responsible for the audit of a listed company should be rotated every five years. Stressing on the need for greater monitoring of auditors, Srinivas Kotni, managing associate at Corporate Lexport said, ?It will be worthwhile to have specific provisions on rotation of auditors. The role of tax auditors and internal auditors can be made rotational.?
Apart from rotation of audit partners, the panel had also called for an annual certification by the audit firm to the audit committee or to the board of directors of the client company stating that it is independent and has an arm?s length relationship with the client.
Significantly, it had also suggested setting up of independent quality review boards (QRBs) for the Institute of Chartered Accountants of India, Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India. The QRBs would ?review the quality of audit, secretarial and cost accounting firms, and pass judgement and comments on the quality and sufficiency of systems, infrastructure and practices.?
Monitoring the monitor
• 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
• 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
• The committee had suggested that the partners and at least 50% of the engagement team responsible for the audit of a listed company should be rotated every five years
• The panel had also called for an annual certification by the audit firm to the audit committee or to the board of directors of the client company stating that it is independent and has an arm?s length relationship with the client