Whither quality audit in India?

When US-based SEC can demand change of auditors or re-audit, why can not the Indian stakeholders and/or regulators do the same with greater vigour?

Three independent adverse press reports have recently appeared on three big names in the Indian corporate world—State Bank of India (SBI), Wipro and Sesa Goa. All point to the quality of the audit process.  


Following the Satyam fiasco these reports should sound as second wake up calls for the audit profession and the regulators—the Institute of Chartered Accountants of India for the audit profession, Securities and Exchange Board of India (SEBI) for corporates and the Reserve Bank of India (RBI) for the banks.


When SEBI failed to act, the Competition Commission of India (CCI) stepped in to fine the National Stock Exchange (NSE) Rs55crore for “abuse of dominant position”. This speaks of the extent which our regulators go.   


The Hindu Business Line had a front page headline—“RBI finds deviations in SBI bridge loans to telecom cos”. The report goes on—“Unicor was sanctioned a bridge loan of Rs2,500 crore without identifying any financial institution for part-financing capital expenditure pending long-term project finance tie-up, neither was there any committed financial tie-up at disbursement in February 2009 when they ought to have completed the roll-out within a year of getting the licence by February 2009. A year later a regular term loan of Rs9,475 crore was sanctioned for the entire project, including Rs2,850 crore to replace the earlier bridge loan when there was no committed tie-up in place. Rs6,625 crore was not released, but the bridge loan rolled out till December 2010”.


Similar bridge loans/bank guarantees extended to Loop Telecom-Rs725 crore, Datacom Solutions- Rs1,100 crore, Swan/Etisalat-Rs395 crore were either adjusted against a regular loans extended later or rolled over. Reliance Communication was sanctioned an unsecured corporate loan of Rs.2, 500cr for capex without any assessment of credit requirements even when the unsecured loans on that scale were simply not permitted. The banks are subjected to a plethora of audits—Concurrent and Inspection, Revenue, Branch and Statutory Audits. Additionally they have Chartered Accountants on their boards of directors, ostensibly monitoring, too.


The second page Business Line has another report—“SEC asks Wipro to prove its auditor KPMG India is independent”.  Failure to do so, Wipro may have to appoint new auditors or get its business books re-audited. This was following the detection of embezzlement of Rs32 crore.


The Free Press Journal reports that the ministry for corporate affairs’ Serious Frauds Investigation Office (SFIO) has recommended prosecution of Sesa Goa on nine counts for over-invoicing of imports by Rs14.6 crore, sales by Rs.42.51 crore and under-invoicing of exports by Rs 1, 200 crore and excess payment of agency commission of Rs40.6 crore. The SFIO also accused the company’s independent directors and statutory auditors for not co-operating and recommended their prosecution.


These major misdemeanours on the part of the companies’ professional independent directors, quite a few generally CAs, heading the Audit Committees, leading up to their dereliction of duties as much as on the part of their Statutory  Auditors does not augur well for corporate governance.


The US SEC (Securities and Exchange Commission) appointed Public Company Accounting Oversight Board/PCAOB, conducts inspections and publishes a portion of each report. A portion of its contents dealing with discussion of potential defects in the audit firm’s system of quality control remains non-public if the auditor addresses them to SEC’s satisfaction but failure to satisfactorily address the matters within twelve months they are made public. The Sarbanes Oxley Act (SOX) in the US has imposed internal control review requirements on auditees as well as registration and quality control reviews on their auditors.


In India we have yet to see the likes of either the PCAOB or SOX. Our new Companies Bill is being tossed up and down for years now with the Indian accounting regulator, the ICAI, pussy footing, the minister for corporate affairs tearing his hair in anger. Here we have a Peer Review mechanism for the review of the Auditors’ papers by another firm of CAs. So far nothing has come in the public domain of any adverse observations, if any, reported.


The Reports of the PCAOB as well as Peer Review of Satyam’s Audit as of the four need to be immediately put on the ICAI website, to lend credence to the quality of audit processes and procedures. The institute’s statements on practices, standards, guidelines, et al, notwithstanding.


The Satyam saga has brought out numerous skeletons now added thereto Wipro with a Rs32 crore fraud, the banks in the telecom companies as well over exposing their advancing norms by granting lines of credit to RIL, ONGC, BHEL and IOC.


The actions, if any, initiated by the three regulators—the ICAI, SEBI and RBI—needs to be put up in the public domain by each of them to satisfy the Indian nation that they are not silent barking watch dogs but active blood hounds with teeth.


The SEC fined the auditors of Satyam millions of dollars in the US for audit deficiencies in India, the Indian regulators here owe an explanation as to why action is not initiated more particularly when the CBI has enough of damaging facts on the Satyam audit.


The actual unabridged reports need to be put up on the ICAI and/or MCA and/or SEBI websites to enable the stakeholders to take a call on the overall quality of audit for which crores of rupees they get paid as audit fees for which the auditors furnish a very guarded Auditor’s Report when all that they report on is neither true nor fair, nor fairly true or fair nor neither!


 When US-based SEC can demand change of auditors or re-audit, why can not the Indian stakeholders and/or regulators do the same with greater vigour?


(Nagesh Kini is a chartered accountant with a long stint of audit exposure.  He is now an activist.)

MK Gupta
9 years ago
In West Bengal, as regards the coop banks, coop societies, chit funds, etc., there is neither any regulator nor any system of audit by the CAs. It is a society free of any audit whatsoever--it is all a club culture, like mutual enjoyment societies.
Mrs Kokila Mani
9 years ago
Making the statutory audit in India is a mere farce. The cooperative 'Speed Audit' Programme launched in last year in Kerala Cooperative auditors found that the programme was launched without issuing any

circulars or orders. In just three months’ time, audit pending from 2008 to 2011 were completed to make it current. Some of them expressed concern that after completing the auditing for the 2011-12 period. Many of them would become jobless. As of now, their salaries, perks, pension contributions and even leave surrender benefits are paid by the PACS, a provision strongly objected to by the financially ailing societies.
The government initiative to conduct speed audit

was against the very concept of auditing. They are now mooting audit by Chartered Accountants as a step ahead of implementing the Central Act as per Vaidyanathan Commission recommendation,
If Chartered Accountants are engaged they will be looking for the arithmetical accuracy.
Could something be done in just one or two months!
The end result was the ratification of all illegal
and corrupt activities by PACS director boards and
9 years ago
Statutory audit is a farce in India. It is only in rarest of rare cases that tiny auditors seek to raise very valid issues while conducting branch audits of Banks and PSUs, but their voice is hushed up under pressure inter alia by giving them very little time to perform their duties and indirectly by regulating their remuneration citing rules. Even the audits of monolithic huge corporates are awarded as prizes and favours and hence the auditors always tend to bend backwards to accommodate the client by overlooking blatant incidents of mismanagement of finances. PSUs'audits are also like this and the upright auditors are usually punished. There is no serious and honest auditing ever in India, otherwise the IT Deptt would not be disallowing claims/adding back huge amounts to declared incomes opf big firms. And there are huge "groups"(some of which are very much in the news) who dodge audit and the tax deptt or SEBI and other regulators with impunity. Except the CAG who has of late become proactive and very alert, the regulators hardly care what sort of audit reports are made. There should be provision for punitive action against audit firms auditing corporates, etc., under the varous Acts like the Income Tax, etc. The ICAI is no more an epitome of integrity as would be clear from the recent disputes relating to elections to its central council and land acquisition matters. It is all a matter of controlling interest--let auditing go to hell !
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