Audit: Elusive independence

shailesh agarwal (professional accountant)   (7642 Points)

22 January 2009  

 

Audit: Elusive independence
Puja Mehra
January 22, 2009
 

 

 
Image
On January 12, elected representatives of accountants and auditors debated the Satyam scam and PWC’s role in it. Many among these 34 members of the Council of the Institute of Chartered Accountants of India (ICAI), the sole regulator for statutory auditors, demanded at that meeting—as others have for years— greater independence from the companies they audit.



Greater? How can the statutory auditors be independent if they are paid by the company they are supposed to audit? Big or small, the fees can influence the report card. “It is the final round of discussions with the management where corners are cut and the accounts window dressed,” says one auditor (See Confessions of an Auditor page 54). CLSA, the global brokerage house, has compiled a list of companies that had adopted what it calls “aggressive” accounting policies for April-June 2008. It had some of India Inc’s brightest stars, including Reliance Industries, Reliance Communications, Tata Motors and TCS.



‘Peer pressure’

Why does this happen? A former ICAI president points to the flawed regulatory architecture—the ICAI is owned, managed and controlled by accountants and auditors and is essentially a trade organisation, a lobby group. “Elected representatives examine misconduct and punish members who they also seek votes from. It’s like asking CII, and not SEBI, to regulate listed companies,” he says.



One solution is for listed companies to pool in money and hand it over to the stock exchanges who can then appoint auditors answerable to the bourses and not corporate executives.
That limits the Council’s role even when it comes to sensible suggestions like allowing rotation of auditors. “Members cite client confidentiality, competence and other such reasons for their opposition,” says ICAI President Ved Jain. In fact, the present council has two members from PwC, the auditor at the centre of the Satyam storm. But ICAI cannot ask them to resign. “How can I ask an elected member to quit?” says Jain. The ICAI is already investigating the role played by some PWC partners in the GTB fraud case since 2006.



Who should pay the piper?

Top office-bearers of the ICAI council agree that the appointment of auditors—and also payment for services rendered—should not be left to the companies they audit. One solution is for listed companies to pool in money and hand it over to the stock exchanges who can then appoint auditors. This will make the auditors answerable to the bourses and not corporate executives.



Peer review and discipline

The ICAI’s peer review mechanism works on an I am-OK-you-are-OK basis. The peer reviews can not trigger disciplinary action. “No firm conducts a peer’s review with the intention of catching fraud, negligence or non-compliance,” says a partner at the Delhi office of one of the Big Four.



The ICAI has 150,000 members. And its disciplinary committee has barred only three licence-holders for life in the last three years. Another six have had their licences cancelled for five years or more. Even now, ICAI is in no position to act against PWC—it can only investigate the partners who signed the Satyam audits and put down their membership numbers.