October 22, 2020
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'Auditors Are Not Machines'

President of the Institute of Chartered Accountants of India (ICAI) on the fallout of the Satyam scam and the role of its auditors PricewaterhouseCoopers

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'Auditors Are Not Machines'

On PwC’s claim that they have carried out due diligence

My disciplinary team and investigative mechanism will show whether what they have stated to our show-cause notice is right or wrong and whether due diligence has been carried out or not.

On the possibility that the auditors were kept in the dark about the misrepresentation of accounts?

It all depends on the facts and circumstances of the case. As the information is trickling down to us, we need to examine what has really happened and how it all happened. That will be taken care of by the disciplinary committee. Then, there is a also a six-member committee that will look at bigger issues such as what needs  to be done to prevent such falsification of accounts in the future. 

Whether the company could have provided different books /balance sheets

See, that is the question that has been agitating us all for so many days now. When a fraud of such magnitude is perpetrated and over such a long period of time, with all the norms being followed, it raises questions about the very efficacy of the norms. But I believe that the norms are in place. So the problem is somewhere else.

Is it a systemic failure or is it a one-off thing?

It is definitely a one-off thing. I have always been saying that it is an aberration, an accident and not a systemic failure. Because of his greed, Ramalinga Raju of Satyam has taken everybody for a ride. When I say taken for a ride, I mean that there is a failure at all levels. Be it among the lower level accounting staff of his companies, bankers, internal auditors, statutory auditors, audit committees, independent directors etc. They have all failed.

So do you believe that there was a connivance or merely an omission on the part of the auditors?

It will be premature to say anything at this point of time.  Only after the examination of documents and evidences will it become clear whether the auditors have connived or not.

Has any rule been flouted?

From January 7, I have been saying that auditors are not machines. Auditors are after all human beings. They have to see so many things and use their professional skill and judgment and there are so many signals that arise in the left and right of the account books that can lead the auditor to various conclusions and suspicions. But it is strange that none of the signals were picked up.

So what you are saying is that they did not catch the trends? 

I will not say that. As president of ICAI, it will be difficult for me to pass a judgment without going through the facts. So we are trying to look at the facts. But looking to the quantum of the fraud and the number of years it has been perpetrated in, definitely it is a serious issue for all of us. And we are all concerned about it.

So are you saying that auditors are not at fault?

I am not saying that the auditors were not at fault. Had I been of the view that the auditors are not at fault, I would never have issued a show-cause notice to the firm. I have also asked them to submit all balance sheets, financial statements and related documents of Satyam Computers audited by them.  Prima facie I am looking into the facts of the case because it is an extremely serious matter. I am calling for an explanation from the auditors. They need to come and explain to me what they have done and how have they done it. The disciplinary committee will examine all the facts and based on the findings they will come out with their real facts of the case.

Is it just a case of falsification of accounts or is there more to it?

I can’t say anything now. Only the investigation will reveal the extent of the fraud.

In case you find some gross negligence of duty on the part of the auditors what actions can you take?

I am armed with an important power. I provide livelihood to the members through the certificate of practice. I can withdraw the certificate of practice, withdraw his/her membership. And this rigorous punishment can be extended up to lifetime. In other words, we can debar a member for life from practicing. Before commencing audit work, all audit firms in the country have to register themselves with the ICAI. This applies to even those audit firms associated with the big four accounting firms. The institute has the power to take action against any audit firm that does not comply with auditing standards.

But what action can you take against the firm because they can withdraw a few members from here and there?

Recently, the Council took a decision that wherever a partner of a firm is found guilty, we will put the name of the firm in our register. And any agency that approaches us-- RBI, CAG, SEBI etc -- for appointment of auditors, we will tell them about the fact that the partner of the firm has been found guilty. We are also requesting to SEBI to ensure that no listed company appoints auditors from firms against which disciplinary proceedings have taken place. Thirdly, we are putting the name of the firm in the public domain. Therefore, before appointing any auditor/audit firm companies can check on our website, firms which have been booked for disciplinary actions.

But you cannot force a company not to appoint certain auditor for their firms?

I can only do what is within my powers. But with the active support of RBI, SEBI and C&AG we can do a lot because we will be covering most of the listed companies, public sector organizations where there is active shareholder interest.

Do you see a failure of the audit committee in the case of Satyam?

See, the audit committee is a part of the management, which should have looked into the accounts. But in the case of Satyam, the audit committee seems to be sleeping. It seems to have no clue as to what happened especially about the huge cash and bank balances of the company.

How does the passage of the Limited Liability Bill help chartered accountant firms?

The Limited Liability Bill has already been passed by Parliament and is awaiting President’s assent. It will help in increasing the level of the firms because now a single firm can have more than 20 partners, which was not allowed earlier.

Given the Satyam fiasco, do you feel the need for some kind of a Sarbane Oxley kind of a legislation? 

The answer is simple. Satyam was governed by the Sarbane Oxley Act because it was listed in the New York Stock Exchange, So this question becomes irrelevant. So if Satyam could happen despite Sarbane Oxley, what is the guarantee that such a fraud will not happen if we have such a law in India? Again, we already have Clause 49, which is similar to Sarbane Oaxley Act.

Can a class action suit be brought against a firm?

It can be brought both against a partner in a firm and also against the firm itself, because the firm is an entity made up of partners. But it has nothing to do with Indian laws.

What else are you doing against errant firms

ICAI has also decided to put up names of all those chartered accountancy firms whose members have been found guilty of wrong-doing in the past five years. This would be a deterrent and would dissuade corporate houses from hiring such firms.

Can you look into the books of other firms if the need arises?

Yes, we can do so under the Financial Reporting Review Board. We can actually call for the account book of companies for audit. So we are talking to the government as to how we can strengthen this procedure. 

A business.outlookindia.com story

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