Making auditors more accountableMOHAN R. LAVI Share · print ·
T+ According to the Companies Bill, the auditor is expected to
report on any qualification, reservation or adverse remark relating to
the maintenance of accounts.
January 1, 2012: Warren Buffet said “Risk comes from not knowing
what you are doing”. Auditors, who can lay claim to being in one of
the riskiest professions around now, may not agree with the Sage of
Omaha since they would invariably believe that they know exactly what
they are doing when they sign-off on the financial statements of the
auditee.
However, the pursuit of profits by a business many a time involves
entering into complicated arrangements which the auditor may not be
privy to or which would be documented in so much detail that the
essence of the transaction is obliterated.
Pluri Cell E Pluri Cell E is in the news for its complicated chain of
transactions ultimately benefiting the Reliance Group – masquerading
as a French couple in the documentation. The Financial Services
Authority (FSA) in the United Kingdom focused on the happenings at
investment banks and their tendency to cross the line between
disclosure and deception at will.
The Securities and Exchange Board of India (SEBI) was conducting its
own investigations into the round-tripping of Indian funds through
investment vehicles abroad that traded in participatory notes and
other derivatives.
The Reliance Group requested for a consent agreement which SEBI agreed
to on January 14, 2011 for an amount of Rs 50 crore. The consent order
barred the defaulting companies and the implicated individuals from
making investments in listed securities in the secondary market
restricted participation in the markets.
But one of the most critical conditions mentioned in the consent order
was that the Reliance Group implement a policy of rotation of the
statutory auditors and therefore the statutory auditors for the year
2009-10 shall not be appointed for a period of three years commencing
from 2010-11. Without saying it in as many terms, SEBI appears to have
found the auditors' responsible for not reporting the round-tripping.
Companies Bill 2011 The Companies Bill 2011 agrees with SEBI. Apart
from rotation of auditors over half a decade or a decade, depending on
the constitution of the auditor, the Bill adds a few more clauses on
the responsibilities of the auditor. He is expected to report on any
qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith and
whether the company has adequate internal financial controls system in
place and the operating effectiveness of such controls.
Other matters connected therewith can include anything and everything
a company deals with and can land the auditor in trouble since he is
expected to play God and know everything in every rule-book applicable
to the company and if the company has followed them. SEBI charged
Reliance with violating the SEBI Act, 1992, the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003 and the SEBI (Foreign Institutional Investors)
Regulations, 1995.
While it is expected that the auditor should know these rules,
detecting non-compliance in a web of cross-holdings could prove to be
tough. Reporting on internal controls is a direct import from the
Sarbanes Oxley Act and does give power to the auditor to say it as it
is.
A residual clause specifies that any other matter can also be
prescribed to be reported. The Bill further empowers the auditor of a
company who- in the course of the performance of his duties as
auditor- has reason to believe that an offence involving fraud is
being or has been committed against the company by officers or
employees of the company, to report the matter to the Central
Government within such time and in such manner as may be prescribed- a
sort of a whistle-blowing mechanism for the auditors.
Risk-reward ratio The provisions in the Companies Bill, 2011 follow
the draft recommendations of the Barnier Report in the European Union
though the latter focuses on joint audits too apart from mandatory
rotation of auditors. As risks and rewards generally go together, the
audit community would expect to be adequately rewarded for their work.
This would be all the more pertinent now since in case they are found
guilty of negligence, the reward is to be returned in addition to
monetary and other liabilities.
The risk-reward ratio would be all the more relevant in the audit of
Government companies where the auditors have an additional
responsibility - facing off with the team from the Comptroller and
Auditor General of India (CAG).
(The author is a Bangalore-based chartered accountant.)
T+ According to the Companies Bill, the auditor is expected to
report on any qualification, reservation or adverse remark relating to
the maintenance of accounts.
January 1, 2012: Warren Buffet said “Risk comes from not knowing
what you are doing”. Auditors, who can lay claim to being in one of
the riskiest professions around now, may not agree with the Sage of
Omaha since they would invariably believe that they know exactly what
they are doing when they sign-off on the financial statements of the
auditee.
However, the pursuit of profits by a business many a time involves
entering into complicated arrangements which the auditor may not be
privy to or which would be documented in so much detail that the
essence of the transaction is obliterated.
Pluri Cell E Pluri Cell E is in the news for its complicated chain of
transactions ultimately benefiting the Reliance Group – masquerading
as a French couple in the documentation. The Financial Services
Authority (FSA) in the United Kingdom focused on the happenings at
investment banks and their tendency to cross the line between
disclosure and deception at will.
The Securities and Exchange Board of India (SEBI) was conducting its
own investigations into the round-tripping of Indian funds through
investment vehicles abroad that traded in participatory notes and
other derivatives.
The Reliance Group requested for a consent agreement which SEBI agreed
to on January 14, 2011 for an amount of Rs 50 crore. The consent order
barred the defaulting companies and the implicated individuals from
making investments in listed securities in the secondary market
restricted participation in the markets.
But one of the most critical conditions mentioned in the consent order
was that the Reliance Group implement a policy of rotation of the
statutory auditors and therefore the statutory auditors for the year
2009-10 shall not be appointed for a period of three years commencing
from 2010-11. Without saying it in as many terms, SEBI appears to have
found the auditors' responsible for not reporting the round-tripping.
Companies Bill 2011 The Companies Bill 2011 agrees with SEBI. Apart
from rotation of auditors over half a decade or a decade, depending on
the constitution of the auditor, the Bill adds a few more clauses on
the responsibilities of the auditor. He is expected to report on any
qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith and
whether the company has adequate internal financial controls system in
place and the operating effectiveness of such controls.
Other matters connected therewith can include anything and everything
a company deals with and can land the auditor in trouble since he is
expected to play God and know everything in every rule-book applicable
to the company and if the company has followed them. SEBI charged
Reliance with violating the SEBI Act, 1992, the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003 and the SEBI (Foreign Institutional Investors)
Regulations, 1995.
While it is expected that the auditor should know these rules,
detecting non-compliance in a web of cross-holdings could prove to be
tough. Reporting on internal controls is a direct import from the
Sarbanes Oxley Act and does give power to the auditor to say it as it
is.
A residual clause specifies that any other matter can also be
prescribed to be reported. The Bill further empowers the auditor of a
company who- in the course of the performance of his duties as
auditor- has reason to believe that an offence involving fraud is
being or has been committed against the company by officers or
employees of the company, to report the matter to the Central
Government within such time and in such manner as may be prescribed- a
sort of a whistle-blowing mechanism for the auditors.
Risk-reward ratio The provisions in the Companies Bill, 2011 follow
the draft recommendations of the Barnier Report in the European Union
though the latter focuses on joint audits too apart from mandatory
rotation of auditors. As risks and rewards generally go together, the
audit community would expect to be adequately rewarded for their work.
This would be all the more pertinent now since in case they are found
guilty of negligence, the reward is to be returned in addition to
monetary and other liabilities.
The risk-reward ratio would be all the more relevant in the audit of
Government companies where the auditors have an additional
responsibility - facing off with the team from the Comptroller and
Auditor General of India (CAG).
(The author is a Bangalore-based chartered accountant.)
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