Relevance of audit reports

These may seem to be harsh words but if we are honest to ourselves, we will be able to accept the truth. Preparation of financial statements is universally an object driven exercise, the reflection of the true state of affairs is rarely one of them. To most, it is ensuring the minimum tax burden, to some others it is keeping investors and lenders happy, and to the CEO it is the proof of his performance. It is left to the hapless auditor to examine whether the statements are true and fair.

It is in this context we must take a look at the audit reports that we issue. One often faces a question from young professionals as to whether it is “necessary” or “mandatory” to report a particular aspect. If we are to express an opinion on truth and fairness of the financial statement we need to disclose and report on every matter that has a material impact rather than making the letter of the statue a fortress to protect ourselves.

I do not believe that the blame lies only at our door, though we cannot escape our share of it. The tax audit report which is the bread and butter for many professionals in this country is an apt illustration. To the auditee the best report is one which causes it the least tax damage. He is not concerned with the content of the report. This is not only the attitude of small businessmen, but the largest of corporations including those in the public sector. The tax gatherer for whom these reports are issued pays scant attention to them. The authorities neither have the time nor the inclination to utilise these reports. Take the case of the report under the Companies Act. CARO 2003 has been with us for eight years now, but I wonder to what extent the regulators have used report under CARO. To both the entity and the regulator these reports appear to be a compliance formality.

The problem is compounded by the complexity of the accounting language. Accounting is supposed to be the language of business. However, the plethora of accounting and reporting standards and frequent changes in them has made this language incomprehensible. The AS, the Ind AS, IFRS can confuse the most competent professional and therefore one has sympathy for the plight of the entrepreneur. It is almost as if we had been asked to speak in Sanskrit, while the listener understands a Bambaiya Hindi. My suggestion to the authorities is to reserve Sanskrit for the gods of business and profession and permit commoners to converse in the language that they understand.

Auditing is the backbone of our profession and if it is to remain so something needs to be done quickly. One aspect is to simplify the accounting language which I have dealt with earlier. The second is to take a re-look at the form and content of the audit report and its universal application. I am sure that in the changing business environment many of the questions of CARO, 2003, are not relevant and even if they are, they should apply only to a selective class. Today, the criteria make their application virtually universal. It is also necessary for the attitude of the regulators to change. It is only if they start using the fruits of our toil better that we will regain the respect of our clients and the public at large. Finally, any effort has to be well rewarded. To the small businessman the cost of audit is a burden. This results in the quality being seriously compromised. The cost of audit increases because the auditor is required to ensure compliance with all the stringent accounting standards and his verification process is subject to comprehensive auditing standards. One possible solution is to revise the threshold limits after crossing which a tax audit is mandatory. The cost inflation index is a very apt indicator. If we rely on that to compute capital gains and pay tax, there is no reason why it should not be an acceptable benchmark for tax audit in its current form. Those below this revised threshold should be required to follow accounting norms which are easy to understand and the auditor should have a much simpler form of reporting. This will possibly meet the requirements of all stakeholders.

I believe that it is only a profession that is able to critically appraise itself survives, otherwise it is likely to be consigned to history. In my view the auditing profession is facing a crisis of credibility. The need of the hour is to take the challenge head on and neither turn a blind eye, nor brush it under the carpet.