August 2019

BANNING THE AUDITORS

Natrajh Ramakrishna
Chartered Accountant

1.     BACKGROUND

 

1.1     This article deals with some of the complex issues relating to the auditor’s role and responsibilities relating to financial reporting in the context of fraud and business failures and the provisions of the Companies’ Act, 2013 that pertain to the removal and barring of auditors, including firms for failure to report material misstatements arising out of the above.

 

The integrity of financial statements is important because millions of stakeholders rely on them for decision-making. Unreliable financial reporting has serious implications; they lead to financial losses, loss of jobs and, most importantly, they shatter investor confidence. The law is settled: it is the primary responsibility of management to maintain proper books of accounts and  build an effective governance framework, including internal financial controls. However, external auditors provide the most critical link between the company and its stakeholders. They are appointed by the members, vested with powers specified under law and they report directly to the members. They have access to the company’s records, systems and processes, all the key members of management who are charged with governance: the board, the audit committee, and all relevant management; they evaluate all significant and other accounting policies; in essence, they do all the work that is necessary for expressing the opinion of “true and fair” on the financial statements.

 

1.2     The Ministry of Corporate Affairs (MCA) recently launched prosecution against several auditor firms (‘current and former’) for their alleged role in “perpetuating the fraud” in a leading financial services and infrastructure company, a matter that has been widely reported in the media. The MCA moved the National Company Law Tribunal (NCLT) for debarment of these audit firms and their audit partners. It sought interim attachment of their properties, including bank accounts and lockers.

 

1.3 In this context, the ICAI Regulations provide for various actions against an individual member for professional misconduct arising from not discharg

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