Yogesh Sharma, partner and head of assurance, MSKA & Associates (audit arm of the consultancy major BDO), comes out in full defence of the auditor community. While Sharma acknowledges that the audit quality could have been better and robust in some cases, he also argues against blaming the accounting profession for every mistake on financial statements.
In the last few years, audit profession has been condemned by industry stalwarts after a series of accounting frauds started unearthing. The latest being the IL&FS fiasco where its statutory auditor, Deloitte is most likely going to face a ban on rendering audit services due to alleged misconduct in the case.
In an interview with ETCFO, Yogesh Sharma, partner and head of assurance, MSKA & Associates(audit arm of the consultancy major BDO), comes out in full defence of the auditor community. While Sharma acknowledges that the audit quality could have been better and robust in some cases, he also argues against blaming the accounting profession for every mistake on financial statements.
He says the stringent provisions in the new Companies Act, 2013 make auditor nervous only at the thought of being pulled up for doing the job as stated under the law. The Ministry of Corporate Affairs, in the IL&FS case, is mulling over the possibilities of taking punitive action against Deloitte under Section 140 (5) of the Companies Act, 2013. This provision allows barring an auditor for a period of five years.
Below are the edited excerpts:
Q: What are your broad views on the quality of audits globally and across India?
Yogesh Sharma: The meaning of ‘quality’ in the context of audit is subject to wide interpretation due to the diverse perspective and expectation of the interested parties – stakeholders, capital markets, and audit reports readers/ subscribers.
For example, whenever a fraud is discovered, it is assumed that the quality of audit is not up to the mark, when practically the audit procedures are not designed for fraud hunting. Also, auditors do not comment on forward looking statements and work is limited to appropriate reflection of past performance, while stakeholders assume that auditors look at every bit of information that a company produces or publishes. It is hence not audit/auditors to blame, every time anything goes wrong with respect to financial information.
It is not audit/auditors to blame, every time anything goes wrong with respect to financial information.Yogesh Sharma, Head of Assurance, MSKA & Associates
It is acknowledged that there are situations where quality could be better and auditing more robust, but to achieve this auditor should continue to push harder for better accounting policies, more transparent financial statements, and early warning signals within the given framework.
Q: What according to you are the missing gaps?
Yogesh Sharma: There is a definitive framework designed in accordance with the Auditing standard, within which audit procedures are carried out. The Audit procedures within the law are different from market expectations. The term explaining this situation is “Audit Expectation Gap”. Audit expectation gap is not a new phenomenon in auditing literature. The Global expectation is that this kind of gap should be reduced by the auditor himself, through improving audit responsibilities, educating various users, and mandating new standards.
The other option could be to re-assess market expectations and change auditor responsibilities and bring in components of forensic investigation in the audit procedures or provide with the review of forward-looking information. This could be burdensome for corporates but if a cost-effective way is sought out, it may/can be a comprehensive solution.
The other option (to improve audit quality) could be to re-assess market expectations and change auditor responsibilities and bring in components of forensic investigation in the audit procedures or provide with the review of forward-looking information.Yogesh Sharma, Head of Assurance, MSKA & Associates
Q: Do you feel auditors are being made scapegoats in the IL&FS case?
Yogesh Sharma: I would not like to comment.
Q: In the IL&FS case, reports are doing the rounds that its auditor, one of the big four accounting firms could face ban for up to five years for alleged misconduct...What is your reading of it? Does this kind of possible action make you more cautious and nervous in your role going forward?
Yogesh Sharma: Again, I would not like to comment on the IL&FS case. But as an overall changing paradigm, the old provision of the Companies Act did not have any provision to ban an accounting firm. Whereas the new act (Companies Act 2013) which is consistent with the global law/ practices states that an audit firm against which the final order has been passed by the tribunal under this section shall not be eligible to be appointed as an auditor of any company for the period of five years and the auditor will also be liable for action under section 447 i.e. punishment for fraud.
The stringent provision certainly makes every auditor cautious (and we already are) and nervous, and also, for the potential punishment even for doing our job as prescribed by the law.
The stringent provision certainly makes every auditor cautious (and we already are) and nervous, and also, for the potential punishment even for doing our job as prescribed by the law.Yogesh Sharma, Head of Assurance, MSKA & Associates
Q: What are some specific measures you suggest that can go a long way in improving the state of audits and restoring public trust?
Yogesh Sharma: The public trust in auditors’ judgments and reputation plays an important role in substantiating audit functions as value‐added services, which lend credibility to publish financial reports. Restoring public confidence requires considerable efforts by legislators, regulators, standard‐setting bodies, the business community, and the accounting profession.
Hence, the suggestion would be to first evolve the auditing standard and procedures to meet expectations of readers of the audit report. Shareholders or board, as applicable, can prescribe to any forensic investigation whenever required.
Second will be to adapt to the evolving audit/ review procedures where a comment on forward looking information can be made.
And last, awareness also needs to be imparted to stakeholders and readers of the financial reports about the framework designed by the law with regard to the responsibility of the auditor.
Q: In your view, how can financial statements be made more forward looking?
Yogesh Sharma: Financial statements are prepared within the framework designed by the accounting standards which have evolved considerably over the last decade especially after IFRS (International Financial Reporting Standards) has been adopted.
Also, it is difficult to perform procedures at the same level as that of audit on forward looking statements. Hence, it may be more appropriate to provide a separate statement for mandatory forward-looking information and define a different framework for its review.
Q: What are the lessons to be learnt from the plaguing UK audits markets?
Yogesh Sharma: I would not go completely by what is happening in the UK. Our economy poses different challenges and we are on a different journey. A lot has changed in India in the last 10 years -- new companies act with significant additional responsibilities for auditors, mandatory rotation and formation of a new independent audit regulator, IFRS, amendments to listing rules etc. These changes need time to stabilise and learning from it can be used for further improvements.
Q: To what extent do the recent reform measures in the UK can be replicated elsewhere near future? Also, what it implies for India?
Yogesh Sharma: The biggest reform measures in the UK replicated are – Joint Audits, Split by Advisory and Auditing functions, Restrictions on non- audit services.
About joint audit the question of readiness is less relevant as this practice already exists in the Indian market, especially with insurance companies and a few large corporates. The moot question is whether this will enhance audit quality and corporate governance.
The implementation of joint audits should not cause a major disruption for the audit profession and/or other corporate stakeholders. One view would be to implement joint audits in a phased manner across a profile of corporates based on size, private/ public, etc.
With reference to split by advisory and auditing functions and restrictions on non-audit services, relevant sections of the Companies Act 2013 specifically provide that the auditor cannot render certain services. What is required is for the Board and Audit Committees to strictly review and monitor such services considering the independence rules. Mere setting of monetary thresholds on fee to be charged for non-audit vis-a-vis the audit fee doesn’t address the issues with respect to independence per se as it is the nature of service that needs to be assessed on a case-to-case basis. Hence, a more robust and regular review by the audit committees and board members should be encouraged in order to maintain a fair balance.
All recent changes introduced to enhance corporate governance practices are a welcome change and India has been the front runner globally. For instance, reforms such as audit rotation have been embraced by India even before it was done by larger countries.
Q: Does the ongoing crackdown on the Big Four open up more opportunities for the next big lot of accounting firms including BDO and others?
Yogesh Sharma: I wouldn’t view or comment on it being an opportunity especially in the context of how it is arising. But there is a need for more than 4 or 5 key players in the audit and accounting industry.
I would say there is a need for at least 10 large firms and initiatives like joint audits and auditor rotation would give more alternatives for corporates to choose from.
Q: What is your view on an ideal auditor-independent director relationship?
Yogesh Sharma: The provisions regarding the relationship of auditor and independent director are prescribed in section 177 of the Companies Act. The provisions in this regard need to be better implemented. There should be more and continuous interaction between the auditor and independent directors.
Separate/ executive sessions should be held between both in order to remain updated on the current affairs and performance of the company. The Audit committees should be more engaged to comment on the scope of the audit decided by the auditor as a part of the audit procedure thereby giving an indication on matters of key importance.
Q: Going forward, what is your outlook on the state of audits?
Yogesh Sharma: The auditing profession is under great scrutiny and has become a subject of much debate and commentary in the public arena as it reaches ‘a watershed moment’.
There are already a number of reviews looking at structural elements of the audit market and examining questions around choice, independence and quality. The aim of its initiatives is to work with companies and other stakeholders to suggest practical solutions regarding the changing role of audit to meet changing needs and expectations of business and society.
Overall, I expect that in the near future there will be a better designed audit procedure/ framework, and better understanding of the market with respect to audit responsibilities. I also expect several (large) audit firms coming into play and probably a more expensive audit process to meet and exceed expectations of a quality audit.
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