Anna Hazare and his people’s movement against bureaucratic and political corruption gained massive support from the public from all walks of life in India. Along with bureaucratic and political corruption, the corporate corruption is also thriving worldwide.
It is a fact that high level political and bureaucratic corruptions are facilitated by a cross section of corporates. Almost all the major scams in various countries and particularly in India are through direct or indirect involvement of big business enterprises. Apart from the scams and frauds that are products of an unholy nexus of businessmen, bureaucrats and politicians, many companies, large and small, are marred by corruption within itself. This results in large scale diversion of funds and inefficiency which invariably affect the interest of all external stakeholders.
Corporate corruption has further strengthened the parallel economy, by moving from the conventional practice of ‘black and white’ transactions to Special Purpose Vehicles and sub-contracts giving a colour of legitimacy to the deals. Such unethical practices have resulted into companies becoming bankrupt and investors losing quite heavily.
In an interview reportedly to the Press Trust of India, the Chief Vigilance Commissioner of India said that Corporates may be brought under the purview of Lokpal. However, an amendment proposed by opposition MPs in Indian Parliament to include corporates within the ambit of Lokpal was defeated during a special parliamentary session convened exclusively for passing the Lokpal Bill. At this juncture, one needs to think loudly for an effective watchdog to check corporate corruption.
The market regulator Sebi has finally woken up to advocate for the expeditious creation of an independent audit regulator in India. The demand for such a regulator to oversee the audits has come in the backdrop of increasing awareness about the dwindling standards of corporate audits in the country. The lack of effective disciplinary action by the Institute of Chartered Accountants of India (ICAI) has also prompted the regulatory bodies and others to think about the need for an independent regulator. Interestingly, but not certain whether it is an immediate reaction, the ICAI has reportedly barred two auditors of an Indian audit firm from practicing for life and slapped a penalty of Rupees 5 lakhs each on them for their role in the 14000-crore Satyam scam. A probe by an ICAI disciplinary committee has found the above two chartered accountants guilty of professional misconduct while their firm conducted audits on behalf the PWC. The action of the ICAI came as a surprise for many as all along the statutory body maintained a position that what happened in Satyam is not an audit failure but a corporate governance failure. Be that it may, the series of corporate scams and scandals happening in the recent years point towards the deficiencies in the current audit system.
Indian laws are not without any provisions to tackle offences by the auditors. The new Company’s Act provides for certain situations in which the auditors can be held responsible for negligence, incorrect statements etc. Apart from the mechanisms of SEBI and Company Law Board, there are internal control mechanisms in the profession through ICAI. However such measures did not create any serious impact in the profession as the deterrence mechanism is very weak. The present powers and responsibilities of the audit committee are unlimited. Members of the Audit committees of many companies lack technical competence and fail in their role as an effective investigator and evaluator.
‘Auditor Independence’- Is it impossible in the current structure?
Analysis of the corporate audits in India indicates that the auditor independence has been compromised due to several reasons as mentioned earlier. The problems lie in several areas: Appointment of auditors, payment of fee, audit and non-audit revenues, the threat of loss of contract, self interests, cultural and primordial preferences while appointing auditors, lack of technical competence, financial and non-financial relationships with the clients etc. Added to the above there are problems of lack of uniform and objective standards, disciplinary authority, over sight bodies etc. In the above circumstances it is necessary to think in the direction of making some radical changes.
Can we have an Independent Audit Regulatory Authority?
As we seen in our discussion and review , there is a necessity for a strong institution to oversee the entire audit work in the country. The set up should have certain necessary attributes. It should be independent, technically competent, representative, multi functional, and with sufficient legal powers. It may be headed by an Auditor General who is nominated by the President of India and should be a constitutional authority with a fixed tenure of at least 10 years. This would make them totally independent of the changing governments in the country. The post should be made constitutional and removal be made only through impeachment.
Following structure is suggested for the above authority. The structure consists of various autonomous boards with independent functions as given below.
INDEPENDENT AUDITOR GENERAL
(Reporting to President; Assisted by chairmen of the following independent bodies)
(Power over both public and private sector without any differential treatment; Chairmen of following independent bodies are members, fixed tenure)
(Responsible for formulating and amending standards)
QUALITY REVIEW AND INSPECTION BOARD
(oversight board which reviews the audit work and conduct inspections)
Enquiries on misconduct of auditors,
Initiation of disciplinary proceedings, and
(Separate entities for each functions)
AUDITOR ALLOCATION BOARD
Centralized empanelment of auditors –specialization wise and region wise based on set criteria.
Allocation through random allotment from a list of ten preferences given by the client as well as the audit firm) Appointment for 5 years without any extension.
Dealing with grievances on Standards, procedures, reviews, inspection, auditor allocation , disciplinary proceedings etc)
But appeals against disciplinary action imposed lies only with Audit board
As seen above, the independent body can oversee streamlining of the accounting standards. Though ICAI has been successfully involved in the preparation of accounting standards, lately arguments have emerged questioning the ‘objectivity’ and ‘independence’ of the ICAI. The role given to ICAI was only for a limited period till such time the central government constitutes an autonomous body to prepare the standards. Since most of the problems related to ‘auditors independence’ is because of the current system of appointment of auditors, the independent authority can be in charge of empanelment and allocation of auditors. As we entered the phase of competitive business management there should not be any distinction between the standards for private sector and public sector. Both should be under the purview of this structure.
Suggestion for National Audit Fund
It is seen that the independence of auditors are affected because of their dependence on the clients for fee. Therefore a National Audit Fund can be created to take care of the auditing expenditure. The entire expenditure for auditing (the audit fee and other audit expenditure for the auditors) should be borne by the Auditor General Office. Fund can be raised through one or all of the following sources: a) Portion of annual fee by companies, b) A very small portion of the investment of each investor c) a fee proportionate to their annual turnover, and d) Amounts collected as penalties and fines.
The public responsibility of auditors as watchdog of companies is very crucial for overall stability and financial discipline in the economy and business. Most of the corporate failures in India and abroad pointed out the ‘audit failures’ in many companies. It is seen that the independence of auditors are under serious threat due to several factors. There is a need for an independent authority to effectively regulate and enforce the audit system in India. The authority should be totally independent of the government and would have uniform standards for both public and private sector. However no authority can be a panacea unless companies and audit firms understand that internal control, personal competency and ethics play crucial role in making the institution more efficient and socially productive.
You may also like to read Satyam: A case of worst audit failure