The companies Bill, 2011 (the Bill) clearly goes overboard when it seeks to haul auditors over coals by making them liable to make good the losses suffered by anyone at all setting store by their assertions in the audit report. A substantial shareholder may mount an attack on the auditor for the reimbursement of losses sustained by him in the bourses, no matter whether the losses were due to his own cupidity or stupidity or due to the state of the industry or the micro or macro economy. To be sure, the Court might come to the rescue of the auditor by taking a more charitable view of his conduct vis-à-vis the losses but the threat of Damocles’ sword over his head can play havoc with his life. A harried banker could similarly find the auditor as his punching bag as indeed anyone burning his fingers in his dealings with the company.
The Bill is likely to raise the hackles of the auditing fraternity not only because of the severity of punishment contemplated - which besides answerability to the malcontents includes paying back of the fees, incarceration and hefty financial penalties - but more importantly because others involved in finance mobilization by the corporate world have been severely left alone. A merchant banker who with company promoters fixes the premium on public issues under the supposedly market determined price discovery process is not held accountable even if the share starts with listing losses. The company promoters are not obliged to hold out a safety net with the SEBI’s present regime being purely optional - obligation to buy shares from retail investors upto 1,000 shares at the offer price should the market fall below it within six months only if it is volunteered. Rating agencies rate an IPO on a scale of five but they don’t have sleepless nights over their rating any more than they do when their credit ratings go awry in the context of debentures and other credit instruments.
The point is unless there is a concerted action taken against everyone involved with corporate finances with blame being rationally apportioned, auditors cannot be singled out for drastic action.
Even outside the world of corporate finances, no profession comes for such harsh treatment. Architects and civil engineers are not called upon to meet the claims for actual and collateral damages in the wake of destruction of buildings by natural or manmade disasters. Doctors in the US resort to defensive medication and costly insurance against potential malpractice claims the burden of which is ultimately borne by medical insurance companies or by patients if they are not covered by insurance. The Indian companies have to likewise brace up for substantial hike in audit fees to cover the heightened risks as well as substantial malpractice insurance fees.
To be sure, auditors must be held accountable but that can happen only when there is a mechanism to sift the grain from the chaff and to apportion blame among various persons involved as adumbrated earlier. Lest a tribe of troublemakers a la ambulance chasers in the US make capital out of auditors’ vulnerabilities, there must be exemplary costs awarded should the charges of negligence turn out to be trivial or unsubstantiated.
To add to his cup of woes, an auditor is also expected to blow the whistle and report to the central government at the first hint of a financial fraud perpetrated by any employee of the company against the company. The Bill while casting the auditor in the role of a whistle blower at the pain of the same penalties enumerated earlier is wishy-washy and delightfully vague. He should have reason to believe that a fraud has taken place or a conspiracy to defraud the company is being hatched. Now it would be his word against the complainant’s. The most common treason against a company is kickback. It may well turn out that kickbacks of gargantuan proportions were paid to promoters by foreign suppliers of machinery but in all fairness to the auditor it is not possible for him to suspect any wrongdoing given the fact that purchase orders need not necessarily go to the one offering the lowest quotation. Technical bids play an equally important role these days, and an auditor is out of his depths in that area. The point is the auditor is not ideally placed to blow the whistle. He is not privy to the hush-hush dealing with suppliers for example. Moreover, he steps into the scene much later in the day, often when the financial year is over thus making his whistle feeble and belated.
Independent directors are ideally placed to blow the whistle as they are privy to the goings on behind the closed ornate doors of board rooms. The Bill instead of targeting them goes for auditors’ jugulars. Ever internal auditors lend themselves better to the whistle-blowing role in view of their constant association with the company.
Chartered Accountant
