Many societies constantly debate the need for letting terminally sick patients choose a way to end the suffering that cannot be medically relieved. Auditing is almost at the threshold of such a situation.
Its allure is constantly slipping out of the reckoning of the very constituencies it is supposed to help. It is on life support provided by hospitable legislation that mandates an auditor’s certificate in many situations.
The most common one being the annual accounts of a company. The audit profession has also been proactive in identifying new avenues where their certification can be extended.
Every now and then, when corporate failures and frauds surface, sharp questions are raised about the raison d`être of the auditing exercise and the insight of the expectations belied.
Most attempts to bolster the credibility of audit work has been tinkering at the edges, like the rotation of auditors or partners, joint audits and cutting out the conflict of interest of doing non-audit services.
Perhaps it is time to look into the future and address the lacunae in audit’ functioning keeping in mind technological transformations that are on the anvil. Also, with the benefit of hindsight and on needs to fix mistakes that have led to the profession repeatedly failing stakeholders.
A typical audit report, I believe, is read only when there is a threat of a pistol going off within an inch of one’s forehead or if the person reading it is employed as a professional proof-reader! These reports say a lot but mean little!
They note the inane, emphasise the trivial and qualify the obvious. The crux, if any, will lie buried in a heap of prevarications and potential defences to future legal challenges!
Auditors take shelter under the convenient phrase ‘true and fair’ that can cover anything from lily-white to deep grey, but maybe not jet black!
Courts have been commiserating in their opinions that the auditor has no responsibility to go after frauds and malpractices and need only to see that which is staring them in their faces. More often than not, the report justifies what the management does rather than challenge and debate.
Proceedings under the nascent insolvency legislation have thrown up data that has brought the issue into sharp focus.
According to the information available up to the end of December 2020, in respect of 1,112 companies that were liquidated, the liquidation value of the assets was a measly Rs43,048 crore against the loan claims of Rs6.05 lakh crore—a princely 7.12%!
It is common knowledge that lenders are expected to extend credit based on known assets in existence. So, even after making reasonable allowances, it is difficult to accept a volcanic crater of this order as pure rounding off errors and rather than large gaping holes in checking the books!
Did auditors in any of these companies qualify or highlight the actual situation?
Some diligent mind needs to undertake this exercise. Indeed, the apex body that governs the profession should do this. Unfortunately, the parent body has been active in courting people in power and resists any attempt to reform.
The new regulator in town, National Financial Reporting Authority (NFRA) is already facing headwinds, and the chairman has been explicit in seeking due autonomy to pursue NFRA’s charter purposefully.
Out of curiosity, I looked at the financials of three leading bankruptcy cases that have hogged the headlines, all for the wrong reasons. These figures pertain to years that were most proximate to when they were respectively taken into the insolvency proceedings.
While it is understandable that the management (directors’) report, in each case, pointed to a prosperous future for the company, the absence of any alarm in the audit report exemplifies the malaise in current standards of the profession.
(Figures are representative and not accurate. The haircut working in IBC is not the same and not to be confused)
The fortress of ‘true and fair’ has made the auditor invulnerable, despite the fortunes of the company audited!
A fair counter would be to question how an auditor can foresee insolvency when bankers queue up to offer new loans even when financial ratios had gone haywire?
An auditor, who sticks her neck out to comment, may end up losing a well-paying assignment!
Certainly, we are back at where we started!
A seminar on the future of audit was recently addressed by a few experts at which PR Ramesh, a veteran in the field, asked tough questions of the profession and the Institute of Chartered Accountants of India (ICAI) and their ostrich-like attitude.
He pointedly referred to the absence of any purpose and value in the standard reporting that covers many pages but says little of actual value to the reader.
He emphasised issues such as the absence of senior people supervising audits, quiescent acceptance of what the client says rather than ‘smell around the place’ and failure to connect the high decibel noise in the market to the accounts audited.
Mr Ramesh cautioned that the apex body’s attitude of dismissing criticism as an expectation gap is a sure way of distancing the services from the stakeholders. He hit the bull’s eye with his observation that the audit report, to retain its relevance, must be explicit about the outcome and the output.
Most auditors miss the wood for the trees, he lamented, while stressing on the salience of linking the internal audit findings to the statutory audit report.
His remarks were sharp, like a surgeon’s scalpel, and it is difficult to compress in a single article, a talk that was poignant with regret about a profession gone astray with little being done by its governing body to set things right.
The primary responsibility for governance is on the audit committee and the board. If the auditor gives her report based on management representations, then the object is frustrated. As an audit committee member, I look to the auditor to provide the fodder to challenge the chief financial officer (CFO) and the management.
In response, the auditor turns around and seeks confirmation from the audit committee that all is well!
When a cost audit is also done, it becomes evident that in juxtaposition to a financial audit, the former provides better insight into the operations and inefficiencies in the system.
Variances from the standard and industry norms can quickly become a cause for alarm for the board to probe further. Financial audit certainly lags behind this feature.
It may be necessary to allow cost auditors to perform audits to tap into this talent pool. This may also help financial auditors expand their horizons by using costing analysis to assess irregularities in the entity’s operations.
Today, the government, which already has most business information residing in its servers, is capable of preparing the accounts of companies and challenge accountants to dispute its accuracy.
Artificial intelligence (AI) can easily capture all suspicious transactions, just as fraudulent credits in goods and services tax (GST) are concurrently tracked.
Most walks of life are threatened in the immediate future by the pace of technological changes. Services that do not create tangible solutions will fall by the wayside.
Disintermediation will be the order of the day, and the audit will be most at risk with the emerging concepts like decentralised finance ‘DeFi’, which is based on blockchain and like technologies. The profession should change before change is thrust onto it.
The auditor is not responsible for corporate failures. But audit, in the present form, does little to arrest it should the chance exist. The idea is to see if that can be changed.
Let audit in the current form die to save the auditors’ extinction!
The case rests there!!
(The author is a CA and CS and retired as a partner at EY, Chennai, heading tax and regulatory advice.)