On December 10, the CAG (Comptroller and Auditor General of India) submitted his report on the results of the audit of financial statements of central public sector undertakings (CPSU) to Parliament, indicating that the value addition on profitability alone in respect of 114 CPSUs by three-phase audit is Rs 2,273 crore. This year happens to be the second year of this innovative experiment in audit of financial statements and certification of CPSU accounts. It was first introduced in 59 CPSUs last year after a series of brainstorming sessions about the pros and cons of the proposed system in different parts of the country. Most of the CPSUs participated in the deliberations along with their statutory external auditors before changing over to this new approach.

As Nobel laureate Amatya Sen opines, Indians are, no doubt, proverbial argumentative species. As is the case with any professional when it comes to judgement, accountants and auditors do indulge in terrible arguing, counter-arguing and differ in their analysis, interpretation and application of accounting standards, principles, rules and procedures, evading finite solution. When there is a huge stake involved and monetary implications can substantially alter the image of the entity before its stakeholders and the value of its share in the capital market, it is understandable how audit exercise can create a veritable mine of intellectual profundity, terrific dispute and dangerous pedagogy. It becomes then a hell-may-care battlefield warring with accounting terminology and concepts, camouflaging beautifully diverging interests.

As the audit of CPSUs is concerned, there are professionals from the management, statutory audit firms and auditors from the CAG of India, who is constitutionally vested with the duty of overseeing and ensuring financial prudence, probity and public accountability of PSUs to Parliament. The three-way interaction facilitates bringing out concerns of all the key actors in the task, keeping the objective of quality financial reporting acceptable to everyone. This audit approach is premised on the assumption that intellect is not a monopolised commodity and intense brainstorming for quality audit can help in resolving complex dynamic accounting issues, thereby producing better outcome in a relentless journey towards Six Sigma quality standards in financial reporting, if attainable in reality.

In order to discharge his responsibility with due diligence, the CAG has adopted computerised online system of inviting applications from eligible CA firms for empanelment every year, making criteria of eligibility, methodology of selection for audit assignments transparent and objective, available in the Website. While determining the criteria for grading CA firms, he consults the Institute of Chartered Accountants of India (ICAI), the regulatory authority of the profession.

Assignments are given based on competency, experience, track record and on the overall suitability. Rotation of auditors is strictly followed, giving an audit firm only 4 years at a go to audit a particular CPSU and, in case of major audits, joint audit system is adhered to. Auditors are prohibited from taking any assignments coming in the way of their independence and if found guilty by professional misconduct, they are warned and in cases where serious irregularities are noticed in the oversight audit, such firms are debarred from future assignment. Comprehensive guidelines with industry-specific directions are given to do the job strictly in accordance with corporate governance principles. In three-phase audit, government auditor gets involved in the financial audit process from the second quarter of the financial year instead of only conducting the oversight supplementary audit after the accounts are signed by the statutory auditor.

The oversight audit has always been the prerogative of the constitutional audit authority and he continues to do the same without any dilution even while adopting changed methodology to keep pace with changing times and helps in factoring the impact of accounting qualifications into the financial statements rather than permitting cluttering the accounts with qualifications and notes on accounts confusing the stakeholders.

The concern of a business enterprise about the uncertain impact of the unpredictable comments on the financial statements makes certification of accounts a domain of control suspense, secrecy and power with the auditor at the risk and cost of the audited entity. In such a predicament, the strategy of the listed business entity necessarily has to revolve around getting a clean certificate from the auditor with nil qualifications, as there is no escape. Lobbying or influencing an auditor is generally viewed as suicidal and risky. Therefore, the intelligent course of action left to the management is to bring him face to face for brainstorming on red-flagged accounting interpretations.

With the help a few mind-blowing treatments to accounts like the infamous Satyam sort of window dressing with the magic wand of a shrewd auditor in a creative accounting environment can easily convert a profitable company into a loss-making one and vice versa. The CAG?s innovative approach to financial audit of CPSUs, known as three-phase audit involves all the key players, including the oversight auditing authority, intensely in the audit process right from the beginning of the year. The primary objective is to bring quality financial reporting. This innovative approach seems to address many of the prevalent accounting juggleries and fraudulent practices and facilitate factoring Six Sigma quality standards in the audit of financial statements.

?The author is director general in the CAG office