Monday, January 12, 2009

Whither the auditors?


One of the major ironies is that Satyam was probably one of the first companies to present its accounts as per the IFRS, which embraces the concept of fair value.

India's version of Enron has finally happened. Satyam-Gate had to occur in the IT industry since the largest numbers in terms of investments, revenues and profits over the years have come from this industry.

It is apparent that a financial wrongdoing of this size — inflated cash and bank balances of Rs 5,040 crore, accrued interest of Rs 376 crore, understated liability of Rs 1,230 crore and overstated debtors of Rs 490 crore — would involve more elements of the balance sheet and, hence, it would not be proper to hazard a guess as to numbers.

Something was waiting to give, thanks to the developments over the last fortnight, although one least expected what has been stated.

Auditors

Though it would take some time for the final numbers to come out and discover all the skeletons in the cupboard, one would not be asking for too much by questioning the role of the auditors.

A first reaction could be that the management has acted in so sly a manner that even the auditors fell prey to these tactics.

The auditors were apparently auditing the books of the company for quite some time now and, hence, a misleading document given to the auditors in 2004 would probably hold good in 2008 also.

Post-Enron, we had the Sarbanes Oxley Act (SOX) in the US. Although Clause 49 of the Listing Agreement was amended to fall largely in line with SOX, being a much more emotional nation than the US, one could expect some drastic steps from the Ministry of Company Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

One of the major ironies is that this was probably one of the first companies to present its accounts as per the International Financial Reporting Standards (IFRS) which embraces the concept of fair value, which attempts to ensure that the balance sheet states the position of the company as it is.

The second and more dangerous possibility is that the auditors knew about it and decided to stay mum. Old-timers in the auditing profession scoff at the audit software of today, and insist that a focus on documentation, manual sampling methods and utilising the concept of exception reporting — going deeper into anything the auditor considers a deviation from normality — would be sufficient to dig up anything that needs digging up.

Audit Committee

One of the most important developments post-Enron was to give unbridled powers to the audit committee. One wonders how this could have passed through a committee supposedly comprising 'independent' people. Independent directors would henceforth have to be independent in the true sense of the term.

The Institute

Many would look to the ICAI for further information and action on this. The ICAI, in its function — to give a very rudimentary corollary — is like the road transport department which conducts tests to find out if one has driving capabilities.

Once satisfied, it issues a licence to practise the art of driving. Now if one decides to flout every law of the land and end up with a broken nose, one can hardly fault the ICAI for having issued the licence in the first place.

Recently, the ICAI issued SSA 550 on Related Party Transactions apparently in response to Satyam attempting to take over a totally unrelated related party. Shareholder dissent stalled the deal while some independent directors showed their independence by resigning from the board.

Just like the hero in a recent Bollywood movie, the parties seem to have suffered from short-term memory loss when questioned about which audit firm valued the companies. Apparently the company is now being looked at as an acquisition opportunity which reflects the grim reality that it takes just one costly, ill-timed and needless move to bring down a major company.

A fearless audit

Globally, there is enough literature now for auditors to conduct a fearless audit. However, given the increasing complexities of business and the scheming manifestations of a few, an auditor would need to consider even the remotest possibility of a material misstatement before he signs on the dotted line.

What feminist icon Gloria Steinhem said probably sums up what auditors should do now: "The first problem for all of us now, is not to learn, but to unlearn."

5 comments:

shalini said...

Class Article!!!Powerful..... Every word makes sense.Very crisply brought out.Well done.

Chandan said...

Thankooooooooooo

P V Raghavendra said...

If some one is trying to say that the Auditor did not know what was happening in Satyam, I just do not believe it.

Anonymous said...

what do u mean by last qote ie to unlearn

Anonymous said...

what do u mean my last quote ie unlearn