More than a century ago, the House of Lords in Kingston Cotton Mills offered a lifeboat, wiggle room galore, and an alibi to boot to auditors, by condoning their shoddy work on the ground that they were watchdogs and not bloodhounds. That encouraged auditors the world over to do namby-pamby work and look the other way when shady and shoddy accounts were screaming for attention. Even a rookie CA would have cried “Dal mein kuchh kaala hai” (there is something amiss) on a perfunctory glance at the balance sheet presented to him for audit but the seasoned ones have been choosing to look the other way and gloss over the accounting and financial shenanigans of the company promoters in the smug realisation that it is not good to bite the hand that feeds you. Either that or simple slipshod work. Both have done incalculable harm to the reputation of auditors who haven’t emerged yet from the crisis of confidence. Qualified reports as against negative reports too have done their part in engendering the crisis of confidence in auditors. There have been instances of numerous qualifications which when totted up had the potential convert profit into loss and positive net worth into negative. Be that as it may.
Enron happened in the USA where future sales were booked as current to window dress the accounts and its auditor Arthur Anderson winked at the shenanigans. It was naturally and rightly consigned to the doghouse; 2008 was India’s Enron moment when Ramalinga Raju the founder of Satyam Computers did something similar — he showed fictitious sales and completed the double entry by getting fixed deposit receipts of banks forged. PWC the pedigreed, Ivy league auditor chose to look the other way and its ‘signing’ partner was consigned to the doghouse too.
The advent of the National Financial Reporting Authority (NFRA) has sent shivers down the spines of the smug, indolent and complicit auditors with as many as 20 CAs and firms barred from practice for one to five years and slapped with a penalty ranging from ₹1 lakh to ₹1 crore in the months of April and May 23. Earlier in 2020, it barred ex-Deloitte CEO for seven years besides slapping on him a penalty of ₹25 lac for his handmaiden role in the infamous IL&FS scam. It is good that NFRA has been cracking the whip that should have been cracked long ago by the ICAI. But then self-regulation has never worked anywhere in the world with the professional body for a given profession behaving clannishly, not wanting to rock the boat. So, let us hail NFRA.
At the base of the auditors’ monumental indifference or complicity, however, remains the self-serving alibi engendered by the House of Lords that auditors are not bloodhounds but mere watchdogs. Roots and branches reforms are called for. As it is, under the Companies Act, 2013, an individual can hold the office of auditor for a maximum of five years after which he cannot be reappointed but a firm enjoys two terms of five years as auditor of a company. Rotation is said to eschew mutual back scratching tendencies i.e., development of cosy relationship between promoters and auditors. But five years or ten years is a long time. If a week is a long time in politics, ten years are long enough to stick together in mutual solidarity.
We must not allow companies to pick up the auditors of their choice. While an accused can pick up a lawyer of his choice subject to the affordability factor as it is ultimately in the hands of the judges to call the bluff of the suave lawyers. But with company accounts there is no such dispassionate outsider to pronounce verdict on the quality of the accounts which is why the auditor should be truly independent. Such independence is guaranteed only by the CAG type of auditor appointment obtaining for the public sector companies. Auditors of PSUs are appointed from out of the panel of chartered accountants at random which eschews the possibility of handpicking. Small wonder PSU audit reports are relatively fearless and not superficial.
In recent times, there have been flashes in the pan. Deloitte has resigned as the auditor of Adani Group's ports business, saying the failure of the conglomerate to commission an independent examination into short-seller Hindenburg Research's allegations of financial irregularities curbed its ability to scrutinise potential related party transactions. In June 23, the same firm, Deloitte Haskins & Sells said delays in financial statements of 2021-22 and resolution of modifications in the audit report of financial year 2020-21 have impacted their ability to complete audits on time and thus they have decided to resign with immediate effect.
It is good that the pedigreed and Ivy league audit firms have become alert. But throwing in the towel is an act of helplessness. It is for the Ministry of Company Affairs to shine its torch on such abandoned accounts, as it were, so that it can reach the bottom of the scam the resigning auditors are hinting at. While the watchdog alibi should be cast asunder mercilessly, the bloodhound role too is simply not there for the auditors because at the end of the day the trail ends in some distant clandestine bank accounts in salubrious climes like Switzerland or Panama where the CBI and ED are at their wits’ end what to talk of auditors despite their recently acquired rudimentary forensic skills. It is good that the ED is gunning after big and small guns but auditors remiss in their sniffer hound role should be visited with exemplary punishment.
S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues