Concept of ‘Independence’ in ‘Independent Auditor’-ICAI EDITORIAL

Concept of ‘Independence’ in ‘Independent Auditor’
corporate entity is not merely a legal personification
but a quintessence of ‘Trust’. Various stakeholders
rely and place their investments on this trustee
with the premise that their investments will be procreated
by expending it on purposes for which funds were sought.
Given the separation of ownership and management in a
corporate model, it is not possible for all to take part in
the day-to-day affairs of the company which are left to
the Board of Directors and key managerial personnel.
Stakeholders largely rely on the published information
emanating in the form of quarterly reports, annual report,
auditor’s report and so forth. The results that the company
publish annually every year reflect the credence of trust to
all those who partake in their investment process. In this
process, the auditor’s role is of paramount importance as
he certifies on ‘true and fair’ view on the state of affairs of
the company.
Given the toughness of situations in which businesses
operate and cyclical situations which it has to undergo, a
corporate growth is a bumpy affair. The global financial
crisis, fall down of financial institutions in the recent past
and the current sovereign debt crisis in select economies
has brought forth cynicism and scepticism in the minds
of investors. As a result trust on corporate integrity is
at low ebb and efforts are on to rebuild it. Regulators
and investors being baffled are still battling against the
corporate misdemeanours and its prevention. The laws
are fraught with different complexities in fixing the role
and responsibility of those at the helm of affairs. How
should be the person at the helm of a corporate body
function? The world at large expects the directors and
the auditors to be ‘independent.’ What constitutes being
independent? There can be many views and reviews.
Becoming and being independent is an individual frame
of mind set and with each personality it differs. Codes on
Corporate Governance have attempted to define how a
director can be independent but a mere prescription is not
a panacea. In the Indian context, there is a definition of an
independent director in clause 49 to the listing agreement
and also proposed in the Companies Bill, 2009. The
society at large and the law also expects an auditor to
be the repositories of trust, transparency, and, therefore,
auditor should also be independent. Unlike the definition
of independent director, the term ‘independent auditor’ is
commonly used but has not been significantly defined.
This brings us to explore the concept of ‘independence’ in
‘independent auditor’. An auditor should not only be seen
as independent but also be seemingly independent.
The legal framework, in which auditors operate,
however, is not sufficiently designed in certain respects to
provide the objectivity which shareholders and the public
expects of an auditor in carrying out his functions. A further
drawback is the lack of knowledge and understanding
amongst the shareholders and public of the nature and
extent of auditor’s role. What auditors do achieve and
what is thought to be achieved leads to an “expectation
gap”, which is widening and is of great concern because it
reflects the realistic expectations by various stakeholders
on audits being done in an independent manner. The
auditors’ role is to report whether the financial statements
give a ‘true and fair view’ (not full and fair view) on the
affairs of the company. His role is neither to prepare the
financial statements, nor to provide absolute assurance
that figures in the financial statements is correct, nor to
provide a guarantee that the company will be a going
concern. The going concern concept and problems are
to be handled and addressed by the management rather
than by auditors. Therefore, a fine-tuning and balance has
to be brought forth by the auditors in their statement on
the conditions on which business is now continuing and
not to mention that business may be susceptible to be
closed down at any time. Another issue, in the growing
expectation gap on the role of auditors, is that whether
the prime responsibility for the prevention and detection
of fraud is of the auditors or the fiduciary responsibility of
the Board. The solution to the problem lies in the support
systems that the company has created by way of internal
controls, constitution of independent audit committee,
etc. To place a duty on the auditors to deduce fraud(s)
is fraught with difficulties because he will never be in a
position to state whether fraud has taken place or not.
Whenever a fraud is perceived to have taken place and
no material evidence is available, it may not be realistic
for the auditors to bring the same to the attention of the
shareholders or at best he can bring out qualifications in
his report.
It is often believed that an auditors report to the
shareholders but work for the management. This myth
lays the stress and strain for the independence, excellence
and integrity of the auditors. Auditors, in order to preserve
their unblemished reputation for independence, should
not have any commercial or conflict of interest in the
company in which he is the auditor. The role of Audit
Committee is an important area to safeguard auditors’
independence and objectivity. An auditor should be seen
from the point of view that his ‘excellence’ in context
of complying with the requirements of accounting and
auditing standards, ‘independent’ in submission of report
to the management without fear or favour and ‘integrity’
that he is true and fair to those who are concerned with
him including the profession to which he is the torchbearer.
In all matters of ‘Trust’, you always find ‘us’. This
is the glory of the ICAI and its members.