This article proposes
fundamental changes to the auditing framework in India seeking to move away
from the present Western framework, which has been blindly adopted, and lead to
dysfunction in our audit profession. There is more, but only a couple of
framework items, namely, marketing and constitutional status, are selected for
the present article. This ‘Indic Framework’ has the potential to drive changes
globally starting with India.
The Supreme Court has
directed on 23rd February 2018, in a landmark judgement against the
multinational audit firms operating in India, in the Sukumaran Case, that GoI
should come up with a new statutory framework. Identifying the root causes of
the problem sets the stage for a new framework. The auditor needs to be
constitutionally provided with a judges’ standing, in a fundamentally
re-thought new-framework, in so far as it concerns his role as an auditor.
Can the auditing system
work if the framework itself is broken and dysfunctional? Then why wonder as to
how come the auditing world has been raining scams and will continue to rain
scams? All we need to do is stop blindly following a defective framework
unthinkingly, because it comes from the West, or because some global firms,
powerful lobbies and governments support it.
The Auditor and The Judge – Marketing
For those who do not have a
clear picture that an auditor is seriously disrespected by the very framework
of the laws, and his position is compromised. The present western audit
framework is unsuitable for the quasi-judicial function of independent
financial statement auditing, should clearly visualise the following comparable
scenarios, and then introspect, if an auditor can still be independent, ethical
and respect worthy, no matter how honest he may actually be.
1 Imagine a judge pleading before the potential
litigants in his court –O Dear Potential Litigant in my Court, please give me
your case to stand in judgement over? please??! And the judge gets praised as
to what a fabulous marketing angel he is?!
2 Imagine a judge doing his brand marketing
exercise with a potential litigant in his court – I will give you my name on my
Order in your case, and, what a great name will be associated with the Order?
You simply cannot compare my name with any other? O Please, how can you go to a
smaller judge?!!
3 The judge then opens up his marketing
presentation and reveals high quality marketing collaterals, which leave his
litigants in a swoon – they can’t think of going to another “ordinary judge”…
It would be infra dig in my cocktail circuits to do that…hmmm..
4 Imagine a judge entering a remuneration
contract with a potential litigant in his court – these are my fees / salary /
consulting charges for issuing an order after I stand in judgement on your
litigation in my court!
5 Imagine a judge offering a bargain basement
“pricing offer” to a potential litigant in his court – I will undercut all the
other judges, I will give you 25 percent cut in my fees, you must appoint me!!
6 Imagine a judge sending snazzy
update-newsletters to the potential litigants in his own court, containing
scenarios of ‘advance rulings’ on what he would do as a judge in various
latest-situations, and telling the potential litigant. “Look at this, you will
not have problems, if your case gets heard in my court”!!
7 Imagine a judge telling the potential
litigants: this is not about me or who I am – this is not a service of my
personal skill and ability, it is not a conscience matter – it is all about the
vast empire of the Big N business of which I am partner and we have worldwide
strengths. What does it matter what is my capacity – after all it is not me, it
is ABCD, the largest “global judgment network” that is doing your work. How can
a lowly single honest judge be compared to ME?!! I am the most honest of all judges
ever!
8 Imagine a judge telling fellow judges in the
courts, you guys are incompetent and lack the capacity – you don’t employ as
many people as I, you don’t train them as well as I do, you don’t pay them as
well as I do. You are all nothing compared to what I AM. LoL. Litigants are not
fools to select me. ROFL.
9 Our judges network offers just about every
other service, doctoring, laundry, housekeeping, construction, what not? You
name it, we have it! Obviously, that makes us best judges. Don’t waste your
time with others! We come to ement delivered right there – don’t be ridiculous,
you don’t have to come to the Courts anymore. You’re the boss! And, ofcourse we
are truly the best in our global-village world – quality in everything we do,
always one step ahead. Cheers!
Constitutional
Authority
While the Judge enjoys
constitutional authority, the Auditor enjoys none. The case for the need to
make this change is identified here. There is indeed a very strong case for
this.
The
Auditor renders a very skillful job of delivering an opinion on the true and
fair view of the financial statements of the audited entity. There are multiple
points in the conduct of an audit where application of mind, involves very
experienced and deep judgment. On the one hand, there are the ‘facts’ of the
case. On the other hand, there are the laws and standards and ‘regulations’. An
application of the regulations to the facts, gives rise to numerous onerous
interpretations involving complex issues of law, probability, precedence,
intent, all supported by independence and ethics. This gives rise to multiple
set of interpretations and understandings of the same facts and regulations.
This is where judgment comes in. While the auditee’s management may argue along
one line, the independent directors, the promoter directors, the audit
engagement teams – at corporate office, and at other locations – and the
consulted subject matter experts, may all choose different lines. This is often
the case. Based on all this, the auditor (signing the financial statements) has
to make a final judgment call and his ‘order’ is contained in his Auditors
Report. It has been repeatedly said especially recently that an auditor’s
signature is relied upon by the whole nation, meaning to say that the role of
the auditor is crucial. Sadly, in all this, the company treats an auditor, who
plays such a crucial quasi-judicial role, like any other ‘vendor’: commercially
and there ends the matter.
This ostrich-like stance of
the western rules of auditing that is the basis of our present laws, defies the
facts of the situation, that in so far as the audit is concerned, the auditor
performs a quasi-judicial function based on exercise of both personal skill and
judgment, involving a conscience-based duty, delivering grass-root governance
to the entire economy in the form of assurance arising from his integrity, and
therefore the present structure is far from salubrious, just as making a judge
subservient to the litigants, denying him the standing, denying him the
privileges, and the financial independence, will all compromise and throw into
jeopardy the legal system.
The very same outdated
framework of laws, which fails to protect the standing and role of an auditor,
however, expects that the auditor should be independent of the auditee, without
providing any support for it. The auditor can be (and often is in present
times) hauled-up for misconduct for taking a stand in his audit opinion, which
need not match with those on the other side of the disciplinary process.
The disciplinary process is
often vitiated because decision-makers do not have a clue and/or have never
conducted a financial statement audit. Finding competent decision-makers to man
the disciplinary-process is akin to finding a needle in a haystack. An auditor
can be sued for defamation if he resigns for making explicit disclosures; and
really speaking it is not at all the auditor’s deliverable to make public
statements other than those he is formally reporting on. Vested interests in
our business world weaponize these legal provisions against the auditor and the
auditing firm in pursuit of their own goals, complicated by incompetence of
those who are given the powers to indict an auditor. Even a casual glance shows
that the classic systemic-failure of a ‘judge becoming subservient to the
litigants’, referred to above, has become the reality.This has jeopardised the
audit process – creating a dangerous environmentthat is now hanging by a thread
– one in which the big fish escape and nameless small issues gain a place of
importance.
The biggest loser of course
is the investor, and our capital markets. Ask well-experienced auditors, and
they will uniformly agree on these forces at work. As a further consequence of
our present defective foundation, the audit process over the years has turned
into an extreme-documentation-exercise rather than remain as one that is
focused on application of responsible professional judgement. The better
auditor is the better file-maker: one who is best able to fend off or absorb
professional liability. This in turn has created a secondary wave of
risks-and-failures. A cottage industry has emerged of ‘auditor shopping’:
good-documentation by presentation-savvyauditors is exploited by corporates, as
a substitute for good auditing. It is all too obvious that the process when
tested in situations will continue to fail, as it is inherently fraught with
inadequacies. No amount of SOX and governance rules, fresh auditing standards,
tweaks to listing rules, independent director training, higher regulatory
authorities, can fix the problem, and having tried it for a few years, we see
that audit failures still continue to happen. Why? Because the root cause of
the failure, namely the lack of standing and authority of an auditor as a
constitutional authority similar to a judge, has failed to be recognised.
It is essential to empower
the auditor and not keep him as a pawn in a commercial game. By keeping the
auditor as a pawn, all rules have already been compromised by interests whose
objective is that. Have we not said always that auditing is a noble profession?
Should there not be a framework to support it? Any disagreements of
stake-holders on an audit opinion, should vest as in the case of the order of a
judge, against the merits of the order itself, through an appeal to a senior
auditor on its content, rather than viciously crucify the auditor personally
and labeling him as guilty of misconduct, effectively destroying honest
professionals (even a single finding of guilt suffices in today’s evaluation
structure), professional firms, and finally de-railing the profession.
Grass
Roots “Good Governance” in National Interest
On a national scale, the
court system, interfaces with less than one percent of the population. The
legal system kicks in only when there is a complaint on a dispute. On the other
hand, nearly one hundred percent of the population is directly or indirectly,
subjected to an audit. Every business, and every charity, is audited. The
financial statement audit is nearly omnipresent and is a substratum of the
nation’s economy. The objective of our times is to bring in good-niti –
ethics, integrity, and good governance. Indeed this objective that is to
be fulfilled is in the motto– satyamevajayate. By re-positioning the
status of an auditor, the reach of integrity and good governance in society
will be almost pushed to one hundred percent.
This shows how vastly
favourable the impact on the population will be by a reform of this nature – in
fact so complete will be the roll out of the process of bringing an undercurrent
to all our affairs, that such a change will completely clean up the country’s
everyday standards of ethics at the grass root level. One can safely say that
this is in our national interest. Kautiliya believed that “greed clouds
the mind” implying that a greedy person could not figure out the consequences
of his/her actions. It is therefore essential that a premium is placed on
probity, and, the audit profession be rescued from the bad framework which
blindly ape the west, and the chartered accountant is given a constitutional
position similar to a judge in so far as his function as an independent auditor
of financial statements goes.
