Auditing Beyond Compliance

The role of the auditor together with the duties and
responsibilities are contained in several provisions of the Companies Act. The
said Act and the ICAI’s Code of Ethics are very specific in terms of the roles
and responsibilities of the auditor and the ‘bounds’ within which he should
operate. The Companies Act of 1956 and the Code of Ethics of the ICAI also deal
at length with the issues relating to ‘independence’ and under which, there can
be various penalties for non-compliance.

In addition, the general understanding of the role of audit
on the part of auditors is that it is a compliance function where the auditor is
appointed to audit the books of accounts for a very specific purpose and that is
to express an opinion of ‘true and fair’. More importantly, the perception is,
had it not been for the requirement under the Companies Act, it is possible that
the client would dispense with this service.

The aforesaid factors have, in one manner or the other, had
their impact on the auditor who believes that his role is that of a compliance
officer of the company that he audits.

Companies also share the general perception that audit is
primarily a ‘compliance’ function and therefore, the auditor should restrict his
role to that of a compliance officer. This thinking sometimes also arises on
account of the belief that auditors do not ‘add value’ beyond audit of the books
of accounts; companies perceive that audit as a function exists to meet
requirements prescribed under the Companies Act with regard to proper
maintenance of books of account.

A number of accounting firms also believe that audit is
purely a compliance function and have therefore set limitations on every aspect
of their work. As a result, clients perceive very little ‘value add’ in terms of
the services rendered and whatever doubts that existed in their minds about the
role of audit gets further confirmed. Companies also use this argument whilst
fixing or negotiating auditor’s fees, little realising the services the auditor
renders.

The purpose of the article is to highlight the fact that
‘looking beyond compliance’ is very much within the overall role of compliance,
except that we need to understand the fact that it is important to shed the
traditional thinking that the role of the auditor begins and ends with pointing
out errors in accounting, non-compliance with law and getting them rectified or
reported.

2. Widening the horizon : What does ‘Auditing Beyond Compliance’ mean !

The perception of audit as a compliance function has to start
with the auditors recognising the fact that they cannot be putting ‘fetters’ on
themselves by playing merely the role as ‘compliance officers’. The important
thing to understand at this stage is, what does ‘auditing beyond compliance’
actually mean. Most professionals imagine this entails adding value in terms of
identifying areas for cost reduction and control, process improvements through
the identification of processes that do not add value, etc. Auditing Beyond
Compliance need not always involve going beyond the normal call of duty as an
auditor as one can see in the following paragraphs :

A. Adopting a pro-active approach to audit :

Most auditors fail to recognise the importance and value in
adopting a pro-active approach to auditing. Transparency and proactivity can
build trust and the auditor must recognise that this policy works in almost all
cases. For example, many auditors involve their client personnel in important
decision making such as planning of the audit. Client staff is invited for
sessions where the audit approach is explained at a broad level; what are
auditor’s expectations from the client in terms of information, the timing of
information, etc., providing general guidance to client staff in the preparation
of certain audit schedules without getting into ‘conflict of interest’
situations, etc. are some of the simple ways of going beyond compliance. Client
staff becomes very comfortable dealing with auditors who work alongside them and
help them understand and address some of the complex requirements. Helping
client staff in various procedures involved in a simple stock-take can add
value. For example, auditors can provide critical inputs in helping client staff
keep the production area clean and demarcated to facilitate stock-count.
Similarly, many auditors transfer knowledge on important areas such as revenue
recognition to enable client staff to record revenue correctly. Cut-off
procedures invariably pose a challenge and the auditor can provide inputs to
client staff achieve effectiveness of cut-off procedures. The auditor can add
significant value in the process of assisting clients without compromising on
his independence as auditor.

B. Partnering clients :

In addition to assisting clients during course of audit, many
auditors partner clients in many other ways: For example, clients face
difficulties in understanding the implications of new accounting standards and
therefore, get delighted when auditors play a pro-active and partnering role.
Thus, when AS-30 was introduced, many clients were not conversant with the
complex requirements. Auditors provided the much-needed knowledge on how to
comply with the requirements relating to ‘hedge accounting’ including
documentation requirements. Clients were advised what needed to be done right
from the beginning, so that they understood the key aspect of ‘hedge
accounting’.

Many auditors recognise the importance of keeping clients informed on all major developments in terms of new laws and accounting requirements, etc. that impact companies in general and a client in particular. As a result of this communication, auditors develop a relationship that results in a ‘no surprises’ audit. This is because, most contentious issues are discussed and resolved prior to year end, particularly with the top management to ensure that nothing is taken to the audit report as a ‘matter of qualification’. All issues that have a reporting implication are discussed well in advance and remedial action taken to ensure closure of issues. It is possible that even after all this, the auditor may decide to go ahead with a qualification in his report. But, this will be seen as clearly the last alternative, as opposed to a feeling that ‘not all options were explored’.

In the past few years, many medium-sized companies have been entering into M & A transactions, collaboration agreements and royalty agreements, etc. These are out of the ordinary transactions and involve complex accounting and other issues where the auditor can play an important role. Many auditors provide clients that are in the process of entering into such transactions, ‘on line’ accounting and other advice, so that accounting implications that have a significant bearing on the transaction can be taken into account before finalising the transaction. Also, it would provide the client with comfort that these transactions will not be subject to accounting review at the year end, since they are already ‘agreed upon’ with the auditors.

Similarly, audit of transactions on a quarterly basis, asking for confirmation of balances during the year or a date close to year end date (without diluting the effectiveness of the audit procedure), etc. are some of the ways in which significant value can be added.

C. Adhering to client deadlines, targets, etc. :

Many auditors believe in the importance of adhering to client deadlines in terms of finalising the accounts. Invariably, board meetings for adoption of accounts are fixed well in advance and cannot be postponed except at great embarrassment and heartburning. In such cases, auditors discuss the entire schedule to finalisation well in advance with the client to ensure that a timeline is drawn up that is adhered to by both parties. In case the timeline is very aggressive, the matter is taken up with management immediately and conveyed. Even in such cases, clients are asked to draw up a schedule to demonstrate that the timelines are workable and realistic. Once agreed upon, there is no question  of ‘backing  out’  at the  last moment.

Fixed timeline audits invariably lead to many arguments and heartburning because the schedule is not adhered to and the ‘blame game’ starts with the auditor invariably being held responsible for the delay. Auditors therefore maintain a very pro-active and open communication with the client where, any potential problems are escalated and thrashed out in advance only, to avoid the blame game. Auditors foresee such issues well in advance and discuss the issue with the client in an open and free manner to save on the ‘last minute’ surprises.

D. Conflict    resolution:

Auditors who do not adopt the ‘Compliance Auditor’ mindset adopt a very positive attitude towards conflict resolution. By adopting an attitude where ‘solutions need to be found if they at all exist’ as opposed to ‘how can solutions be found in such cases’, auditors go beyond the compliance approach to partner clients on a very pro-active basis and in the process add significant value. The auditor perceives his role not merely as a ‘compliance officer’ whose job it is to find mistakes, errors, deviations from accounting practices and non-compliance with law, but looks at such issues with an open mind to ascertain whether solutions exist, before reporting them to the members.

Most auditors believe that finding solutions to problems is not their ‘business’, whereas clients feel delighted when auditors perceive their role as ‘solution finders’ and not merely, ‘fault finders’. As a result, clients see great value even in cases where the auditor is constrained to report such deviations, etc. in his audit report.    .

E.  Mentoring and knowledge sharing:

An auditor gathers Significant amount of business knowledge during the course of audit. In many cases, such knowledge does not get shared and is a waste. However, many auditors share the knowledge they have acquired during course of audit by way of communication to audit committees and boards. In addition to sharing knowledge gathered by him, management letters containing areas of cost reduction, better compliance, etc. are high-lighted and discussed with the client together with a clear plan of action to avoid recurrence. Clients also feel delighted with auditors who identify areas which help remedy faults from recurring. In the process, the auditor adds value that goes beyond the ‘compliance function’.

F. Conclusion:

Adopting the right attitude towards the audit function and working beyond self-imposed constraints are options that are clearly available to the auditor without compromising on any of his duties and responsibilities as the auditor. Auditors need to recognise that playing the role of the ‘compliance officer’ does not mean putting a fetter on one’s ability and attitude towards the role. In fact, the auditor invariable gets an opportunity to play a pro-active, positive role in terms of partnering the client. Assisting the client improve upon his stakes is the best way to transform. As a matter of fact, the only way to transform is to play an active role in helping and mentoring clients change for the better.

If audit is to be given the right place and value, auditors, companies and other institutions need to work towards getting audit its rightful place and that is, it is one of the most valuable and insightful functions that is awarded to an ‘outsider’, who is provided with an opportunity to look at various transactions entered into by the company in a systematic and insightful manner, evaluate at times business risks in addition to various aspects of internal control including assessing the ‘tone at the top’ that is set by the management in the course of business.

The profession of accountancy and audit is on the threshold of significant changes in the wake of the business failures that we are witnessing by the day across the world and if it has to serve its role effectively, it will need to get rid of the shackles it has put itself under and work towards expressing itself constructively, in a pro-active manner. An auditor should work as a partner to the business by communicating to the audit committee, the board and the management in a timely manner on all important issues of which he has gained knowledge during course of audit.

Lastly, the ICAI has embarked on a massive project aimed at making the entire accounting framework IFRS compliant, by 2011. Auditors have been provided with the most valuable opportunity to assist clients in this process in several ways without, at the same time, getting conflicted out. Auditors of companies have already started advising companies what the implications are and what the impact would be in the year of transition. Companies are therefore delighted that auditors have become very pro-active and this augurs well for the profession.
 
‘Auditing Beyond Compliance’ therefore is largely, a mindset issue and auditors really need to embrace change to become more relevant to their clients by adopting a more proactive, constructive and ‘partnering’ approach towards clients. The challenge before the auditor is to become the client’s trusted advisor and partner, without losing out on ‘independence’.