When this issue of the Journal reaches you, the deadline for
completion of audits and filing of returns will have just passed. You, along
with your partners, colleagues and staff, must have burnt midnight oil (in some
parts of the country literally) to comply with this deadline. You will have
placed in the hands of your clients, and other stake holders, your reports which
are expected to contain your opinion as to whether the financial statements show
a true & fair view and whether the particulars which you have verified are true
and correct.
The audit process which you follow, and which culminates in
your report is expected to comply with certain assurance standards. The accounts
which are audited have to be compliant with accounting standards. Over the past
few years we have seen, in many forums, protracted debate over the extent of
disclosure required in the accounts. The tenor of discussion often is that if an
opinion need not be expressed according to the letter of the law or if a
disclosure is not required, such an opinion should not be expressed or a
disclosure should not be made.
According to the classical definition of the role of an
auditor, he is required to express his opinion as to whether on the basis of
generally accepted accounting principles (GAAP), the financial statements show a
true and fair view. Today these GAAPs have to be read with accounting standards.
In respect of corporate entities the accounts have to comply with the standards
prescribed by the Central Government in consultation with the National Advisory
Committee on Accounting Standards. Non-corporate assessees have to follow most
of the accounting standards prescribed by the Institute of Chartered Accountants
of India. Non-compliance attracts a qualification in the auditor’s report. Some
of these standards are so complex that Chartered Accountants have to debate
interpretation of some of their aspects. In most cases neither the owner/
promoter nor his ill-equipped accountant understands the true import of these
standards. In this scenario, General Purpose Financial Statements at times lose
their purpose of communicating the state of affairs to the reader.
I am conscious of the fact that businesses have become global
and competitive. Measurement and reporting standards have to have an
international acceptance, since the financial statements of entities doing
global business have to be interpreted by users in different countries. However,
the number of entities carrying on such scale of activity is minuscule compared
to the number of entities whose accounts are subjected to audit under one
statute or the other. My only concern is that in the quest for standardisation
and perfection, we should not make presentation of accounts and related
disclosure requirements so complex that the expectation gap between what the
society expects from us and what we deliver becomes so large that we cannot
bridge it.
The accounting standards and reporting requirements mandated
by various statements have the objective of standardising the measurement of
accounting estimates, various disclosures and the manner in which opinions are
expressed by auditors. This is done to make financial statements by various
entities comparable and understood by all users in the same way. However, in
trying to achieve this objective, if both, financial statements and the reports
thereon become lengthy and incomprehensible, it defeats that very objective.
Once this happens, these statements and reports are put away for future
reference but are rarely referred to. It would be interesting to note that the
tax audit report has been with us for twentyfour years. Yet a note from the CAG
dated 31st July 2008 exhorts revenue officials to read this report and in the
same breath asks action to be taken against professionals who have issued
erroneous reports.
Over the years, regulatory authorities, if I may use the
term, ‘outsourced’ responsibility to the auditor. The auditor is required to
comment on or report on aspects which are inherently the domain of the auditee
or the regulatory authorities. With the onus on the auditor being increased
substantially, he may tend to comply with the letter of a regulation rather than
the spirit. He may side-step the regulation, rule or reporting requirement, if
he can do so with some justification and adequate protection. Often more
attention is paid to documentation and working papers, rather than verifying
accounting records to form an opinion. Audit then becomes a compliance ritual
and the soul of audit which is an expression of opinion in regard to the true
and fair view, is lost. It is this opinion that a reader is looking for. The
world accepts that accounts are essentially estimates. The assurance that it
expects from us is that these estimates are made bonafide and in compliance with
the generally accepted accounting principles. If there is something amiss, the
attention of the user must be drawn to that fact. This assurance or if I can use
the term ‘blowing of the whistle’, must be in the simplest form.
I think there is a need to extensively deliberate upon these
issues and find solutions quickly. The International Accounting Standards Board
(IASB) is already in the process of formulating IFRS for SMEs. The only issue is
what constitutes a small and medium enterprise would be materially different in
different countries. If compliance is to be encouraged, India should take the
lead in formulating these simpler standards for SMEs. Stringent measurement and
reporting standards should be restricted to those entities where the users of
those statements and reports can understand them and appreciate their nuances.
If the reports are for different users with different
objectives, distinct formats of both financial statements and reports can be
contemplated. There will be problems in doing this but I am sure they can be
sorted out. For a vast majority of entities, especially non-corporate, the
disclosure requirements should be far simpler as should be the reporting
formats. This will strengthen the faith of the public in our profession which
has been repeatedly shaken in the recent past due to failures of corporate
giants.
All what I have said above actually passed through my mind
during this September. I felt that before we commence audits for the new year it
would be appropriate to leave my thoughts on the subject with you.
This year the advancement of the due date has left us free to enjoy the
festival. I take this opportunity to wish all readers and their families a happy
Diwali and a very prosperous and happy new year !
