September 2019

GROWING CONCERNS ABOUT GOING CONCERNS

Raman Jokhakar
Editor

The Indian economy is going through a tumultuous time. Rs. 1 trillion1  were wiped out of the markets due to various causes. A more distinctive feature is that several pillars of the economy are in the news for the wrong reasons. From NBFC2s, Reserve Bank of India3, SEBI4, Credit Rating Agencies5, to Stock Exchanges, bankers6, National Clearing Corporation, NSDL7 and auditors.


However, the reports on audits and auditors are most distressing. The central banker banned a top audit firm; criminal charge sheets lodged against two other top firms and partners in the IL&FS case; MCA seeking a five-year ban; reports of an auditor leaking price-sensitive information; MCA approving the removal of an audit firm; auditor resignations; blaming the auditors for the stock price fall, and more.


Before we look more deeply at the audit framework in India, auditors have been implicated in many other parts of the world and much of this seems symptomatic. An FRC (UK) report8  has dealt with a number of aspects of the audit market, including audit quality and audit failures. Notable reasons given by the report are: a. Failure to exercise sufficient professional scepticism or challenging the management, b. Failure to obtain sufficient appropriate evidence, and c. Loss of independence. The FRC report also points out perils of the precarious audit market structure with ‘too few to fail’ firms which make up the audit market (97% and 99% in the UK and the US securities markets are audited by only four auditors). India hasn’t reached there yet but it seems like it is on its way, ignoring structural problems and treating symptoms superficially. The report also states that each of the top four ‘audit’ firms reported three-fourths of their revenue from ‘non-audit’ services and faster growth in ‘non-audit’ revenue. The ‘auditors’ are actually doing more ‘non-audit’ work and suspected of getting audit work in order to get more lucrative ‘non-audit’ work. Coming back to India, the MCA should have done much more and much better in presenting data on the above lines rather than bringing out a rather hasty and flawed report9 last year.

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1   Bloomberg Quint report published June 23, 2019 – Eleven Stocks, $14 billion erased

2   IL&FS, DHFL etc.

3   It was expected to keep an eye on systemically important NBFC, SFIO pointing out that it should have acted faster

4   Reported to be the most powerful market regulator in the world who could have done more in ‘algo’ scam

5   Giving credit ratings that turned out to be worthless, ICRA CEO and MD asked to go on leave

6   PSB NPAs at Rs. 806,412 crores in March, 2019 or Rs. 8.1 billion (per PIB release of 24th June,.2019)

7   Allegations of shares moving out of pool account of a broker in allied matter

8  Statutory Audit Services Market Study, 18th April, 2019

 

The root causes within the auditing framework need examination. The problems and surrounding questions are many and complex but not impossible to overcome if dealt with in right earnest. The problems are written on the wall – i. Appointment of auditors (mostly by a common management and ownership), ii. increasing concentration in the audit market (oligopolistic audit market where market leaders begin to convey a sense that they are the market – too big and too few to fail types), iii. multiple regulators (SEBI, MCA, NFRA, ICAI, RBI, etc.), iv. misunderstanding about audit (what it can do and what it cannot do), v. conflict of interest and independence issues (audit firms are connected with group entities looking for non-audit work), and vi. a misty reporting framework (changing and difficult to fathom) to name a few.

The expectation and delivery gaps are widening and blurred. Auditors, regulators and the public do not understand them in the same sense. It seems that an auditor today is neither a watchdog nor a bloodhound, but rather a sniffer dog. So long as an auditor has done what the auditing standards ask of him, he cannot be sent to a doghouse. All the same we have more questions than answers, and we need to flip that fast – before it’s too late.

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9   Findings and Recommendations on Regulating Audit Firms, October, 2018

 

 

 

 

Raman Jokhakar

Editor

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