When auditors raise the red flag

Over the past few months, there have been several instances of auditors raising the red flag against certain questionable business and accounting practices followed by their clients. The qualifications and observations noted by auditors include doubts over the ability of a firm or one of its subsidiaries to continue as a going concern, questions around the adequacy of a company’s internal control mechanism or even certain transactions undertaken by the promoters. In one case, the statutory auditors even refused to sign quarterly financial results, unless the promoters presented a clear path on how they plan to return the money borrowed from the firm.

So, is the audit fraternity finally coming to terms with increased scrutiny of their action? Most auditors agree in light of the spate of scams and frauds — both in India and globally — the profession is under a scanner like never. “It is not surprising the auditors are being extra vigilant,” says Dinesh Kanabar, CEO, Dhruva Advisors.

What may have also contributed to stepped-up vigilantism on the part of auditors are the new provisions on rotation of audit firms.

However, there are many in the fraternity, like former ICAI president Amarjit Chopra, who feel one may be making too much out of the observations made by auditors. Chopra is of the view that concerns raised by auditors are also a reflection of the state of the economy. “When the economy is booming and the promoters are in a position to infuse funds in the corporate, either on their own or through the bankers, or strategic investors, going concern issue may not be relevant. But when there is a downturn, these concerns become more relevant,” he says.

Shailesh Haribhakti, chairman, Haribhakti & Co, strikes a middle ground. He says, “The qualifications and reservations were always there. It is natural that more analysts are noticing these qualifications and commenting on them. This is a healthy trend,” he says.

Vishesh C Chandiok, CEO, Grant Thornton India thinks it is natural for auditors to learn from events around them. “Auditors ought to enhance their professional scepticism when events in an industry or environment suggest the need to do so,” says Chandiok.

Hetal Dalal, COO, Institutional Investor Advisory Services, feels the recent focus on the role of auditors, following a spate of scams and fraud, is justified. “Some of the recent frauds could have possibly been avoided had auditors tested the level and quality of financial control rigorously,” she says.

Kanabar says the degree of trust and reliance that the auditors may have placed on management representations in the past is now replaced with scepticism. “A management note to the accounts ‘disclosing’ what has been done or general comments on the adequacy of controls are no longer sufficient.” Chopra points out that the role of the regulators, be it the RBI or SEBI or ICAI or others, has undergone a significant change over the years.

Moreover, the International Auditing and Assurance Standards Board, an independent standard-setting body, too has upped the ante for auditors. It regularly keeps upgrading the standards on auditing, including those on reporting by the auditors.

There is also an issue of expectation gap that the audit fraternity needs to address. “This seems to be a classic example of the ‘expectation gap’ between what the auditor’s role and responsibility is and what is the perception of their responsibilities by the public at large,” says Chandiok.

“An auditor does not sign off on the financial health of business they audit. They merely express an opinion on the accounts they audit,” explains Kanabar. It is important to understand this distinction, he says. Chandiok too agrees that this perception versus reality gap needs to be reduced through public education.