The future of audit firms in India: It's expectation versus reality

Audit is in an unprecedented period of crisis, needing the profession to step up, said Vishesh C Chandiok CEO of Grant Thornton India

The chief executive officer (CEO) of Grant Thornton India, Vishesh C Chandiok, recently announced that the company would no longer be doing non-attest services such as consulting, transaction advisory and valuations for audit clients out of India. “Audit is in an unprecedented period of crisis, needing the profession to step up,” Chandiok said on Twitter, while announcing the firm’s decision to have a complete ban on such non-attest services.

Grant Thornton’s decision to place the ban is to do away with the perception that auditors compromise on their independence and objectivity just to get such non-attest services, said David Jones, partner at Walker Chandiok and Co LLP. Grant Thornton India carries out its audit assignments in the country through its affiliate Walker Chandiok & Co LLP.

“It is definitely beyond what is the call of the current regulation. We have taken the step that we will not even do the permissible ones. We are saying that we will not even leave that question of the auditor’s objectivity being questioned. We are also dealing with perception. It is one of the many steps that we believe is imperative to help restore faith in the profession,” Jones said.

Though Grant Thornton clarified that its decision had nothing to do with recent crises in the financial services businesses, the perception of auditing companies has indeed taken a severe hit over the past month or so, several experts said.

In the aftermath of the crisis that erupted at Infrastructure Leasing & Financial Services (IL&FS), investigative agencies have gone as far as to move the National Company Law Tribunal (NCLT) seeking a ban on two of the top auditors of the country. The Ministry of Corporate affairs wants Deloitte Haskins & Sells, and BSR & Associates banned for five years for alleged collusion with the management of IL&FS’ subsidiaries in money laundering and failure to report mismanagement. While there could be lapses on part of auditors, calling such errors “organised crime” would be a step in the wrong direction, industry professionals said.

“If it is held that there is a partner who is guilty, the responsibility lies with him or her. If it is identified that the firm did not have proper checks and balances in place, some action is justified. Even then, outright banning is not the answer. There could be added oversight on the firm or put some restrictions such as on acceptance of new clients for a certain period of time,” said an auditor.

 

The auditor is no longer just the watchdog as the role has moved beyond that. Auditing firms cannot, however, be expected to become bloodhounds expected to find and highlight all the frauds that can or maybe occurring in the company, experts said.

“There is an expectation gap between what auditors deliver and the requirements of stakeholders. The auditors and auditing standards need to address some of these. To what extent is a debate that we must have,” said Sudhir Soni, national director and partner, Assurance Services, S R Batliboi & Associates LLP, adding that there is an element of reliance on company’s internal controls too.

The current failures and frauds that have emerged at non-banking financial services is also a sign of breach of internal control and management of such companies, another expert who did not wish to be named, said. “It is most difficult when management frauds are done. The management is able to override the controls which are in place. Auditors work along with the management and the board,” the expert said.

The anomalies which are being identified with the books of financial services companies that have gone belly up is also the difference of view between how regulators are looking at it and how auditors are looking at it, another auditor said.

“Is it actually a fraud if there was negligence? Often times both the ideas get muddled up. An accounting point  of difference is considered to be a kind of negligence. It is a situation of unless proven innocent, you are guilty,” the auditor said. There is also the problem of multiplicity of investigators coming after one auditor for his negligence, which will impact the attraction of talent to the profession, a partner at one of the big four auditing firms said. “The sector regulator, the government, the securities regulator…there is a multiplicity of regulators. If you add financial services, there is another layer to it. That makes everything more complex because everyone wants to have their sunshine moment,” he said.