The importance of independent, ethical auditors cannot be over-emphasised. Their certification of public companies is the touchstone for all the other stakeholders in the economy.
This is not about the peccadilloes and shenanigans of the erstwhile Satyam chief, who, like many other influential citizens of the Republic, is taking the Mickey out of the country’s judicial system and further lowering its image in the eyes of the common person, if any Houdini could even dare to attempt such a feat.
The Satyam scam is, however, an appropriate backdrop for another issue that forever hovers over corporate debate in these shores, namely the extent to which statutory auditors of listed public companies can be made responsible for their sins of omission and commission. In other words, how do we make Indian auditors accountable?
The critical theme here is the functioning of a pivotal element among corporate stakeholders. This element has traditionally been assigned the crucial role of watchdogs and monitors. In reality, however, some of these accounting firms that operate as auditors of public corporations have functioned as pliant poodles in the hands of their managements and owners. This is an international phenomenon, as events in the last two decades have shown, but it would be poor consolation for Indian investors to be sold the line, as the late Mrs Gandhi once did in the context of corruption, that they should be grateful for being part of a global malaise.
The importance of independent, ethical auditors can hardly be over-emphasised. Their certification of the accounts of public companies is the touchstone for all other stakeholders in a market economy. Shareholders, potential investors, tax authorities and analysts all rely on the accuracy and veracity of audited accounts statements. For price determination of equity shares and other securities in the stock exchanges, the starting point is the audited financials. This fiduciary aspect of the auditors’ work must never be forgotten. This is the reason that European and Anglo-Saxon company law for the last 140 years has assigned such an overarching role to auditors.
As usual, in these shores, we have defined new norms for auditors. These denizens, along with other cabals like lawyers, bureaucrats and the judiciary, have usurped a cosy niche in our legal and social framework that provides them virtual immunity for all their shenanigans. Every few years, a major accounting scandal comes to light; from the CRB fiasco in the mid-1990s (where the auditor's address turned out to be a locked-out warehouse) to the Satyam imbroglio, we have seen these scandals erupt and then being forgotten. When there is sufficient protest from investors, shareholders and general citizens, the powers that be make some token gestures that hardly address the core problems.
The fundamental difference between the Americans and us is that the land of super-capitalism has very vigilant and effective regulatory bodies that constantly learn from their mistakes and from evolving ground realities, whereas we have nothing remotely comparable.
The Companies Act (with all its amendments since 1956) provides no relief or succour to victims of auditors’ fraud and/or negligence. The relevant section (233) of the statute dealing with non-compliance/ default by auditors in the discharge of their functions and duties provides such a derisory punishment (a maximum fine of Rs 10,000) that one need hardly dwell on its deterrent effect. The other so-called regulator, the Institute of Chartered Accountants of India (ICAI), the professional body of accountants, is equally chinless and impotent when it comes to disciplining and sanctioning errant Indian auditors.
Peer group disciplining and enforcement has always been a non-starter in India. Whether it is the senior judiciary (high courts and the Supreme Court), the bureaucracy, the legal or the medical profession or accountants, we have almost never seen wrongdoers punished by their fellow members. In the US and the UK, there have been innumerable examples of the bar and the medical fraternity talking stringent action against their own, whereas one cannot remember a single similar disciplinary measure in India. The ICAI, in any case, seems determined to take the matter to more derisive levels. It strenuously fought a legal battle against the Bombay High Court's recent judgement that clearly upheld the right of Sebi to investigate the alleged malpractices of Satyam's auditors. The ICAI would prefer to have no Sebi jurisdiction at all, arguing that the ICAI is the competent agency to go into offences committed by auditors. There can be nothing more egregious than this.
Dispassionate analysts studying the scene are demanding that India urgently needs to create an independent organisation like America’s Public Company Accounting Oversight Board (PCAOB). Established under the provisions of the Sarbanes-Oxley Act, the PCAOB is a private-sector, non-profit corporation, governed by US federal law, to monitor and oversee the functioning of auditors of public companies. Sarbanes-Oxley, to start with, initiated a major overhaul of the American accountancy industry. It created a watertight division between the audit and consultancy practices in accounting firms, thereby eliminating a clear conflict of interest. The PCAOB has sweeping powers under its belt and a clear mandate to ensure that auditors perform their fiduciary and statutory duties. Every accounting firm with an audit practice must register with the Board and thereby make itself subject to its investigating and supervisory jurisdiction.
A definitive study of the functioning of the PCAOB would be a major exercise. However, all analysts and commentators are agreed that it has fulfilled most of its mandate and it provides a model for other countries to emulate. In India, there will be considerable opposition from vested interests. This should not deter the authorities and the legislature; they must commence the exercise to ensure that Indian auditors do not double up as culinary experts who cook the accounts books.
The author is a senior corporate and business analyst in Delhi
