Exclusivity and Trust
A profession normally has certain
exclusivity – legal and/or perceived. Such exclusivity commands an obligation
of trust. Competence and credibility herald this exclusivity. A Chartered Accountant’s
exclusivity generally lies in his capability to:
a. understand substance over form,
b. decipher and analyse the evidence
underlying such substance, and
c. finally arrive at a judgement over
financial reporting
The exclusive license given to CAs to attest1
is a result of a lifelong commitment to a skill set and ethical orientation.
Skill and competence without values and ethics fail miserably. The exclusivity
to ‘attest’ financial reporting of millions of entities and billions in value
casts an obligation of trust. The numbers derive their full value from the
signature of an auditor. The IFAC code of ethics (2018) says it in this opening
line: “The distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the public interest”. This
is the direction of an accountant’s compass, his True North.
Turbulence
The accountancy profession is undergoing
turbulence. Some of it is of its own making and some thrust upon it.
Expectation chasm, reporting frequency, measures of business performance, the
pace of change, complexity, corporate culture (unspoken behaviours, mindsets
and social patterns), thinning lines between evidence and substance, are some
challenges and even threats to the audit profession.
While accounting is more or less taken over
by technology, perhaps audit too will soon be done 100% and in real time by
machines. Human intervention in future could be close to nought.
Recent news about auditor resignations –
mid-term or days before results, SEBI Order banning a firm for wrongdoings of
partners, Audit Report changes, SEBI seeking powers on auditors, ministers
blaming auditors before investigations, putting auditors behind bars,overnight
activation of NFRA – these are all worrying trends.
Role vs. Expectation
As an intermediate student, I was taught
that an auditor was like a watchdog (meant to bark when they saw something
suspicious) and was not meant to be a bloodhound (seek the suspicious). Twenty
years later, there are several watchdogs watching the auditors, and some even
hounding them. The expectation from an auditor today is akin to a sniffer dog –
to look out for dangerous, suspicious, and explosive content that could
potentially endanger the auditee. Whether one agrees to the above re-characterization or not, there is an underlying
indication, however implicit it may be, to a dog’s life!
Auditors are blamed by some (who should be
forgiven for they have not learnt sampling and materiality) driven by rhetoric
and not reasoning, facts and objectivity. Nevertheless, over seven decades,
auditors have cumulatively endured in doing a commendable job in preventing
businesses from crossing the line.
Global Macros
I do not know of the statistics in India
post rotation, but the global audit scene is alarming: Big becoming bigger, to
an extent of ‘too big to fail’. This often drags others into failure. When a
part of the system begins to feel it is ‘the system’, it gives an impression of
infallibility and indispensability. Diversity and distribution mitigate the
risk for everyone and not the other way round. In spite of regulations and
regulators, armed with teeth and paws, corporate failures continue unabated.
The recent
Carillion failure as reported widely in the UK is a case in point: A top audit
firm gave a clean bill of health for £ 29 m fees. Another firm ran the internal
audit and could not report ‘terminal failings’ or ‘too readily ignored them’.
Another firm led the restructuring of the failing giant for £ 13 m in fees
between July 2017 and January 2018 and took the last cheque of £ 2.5 m, a day
before the collapse. Directors prioritised senior executive bonus payouts and
dividends (before pension payments) as the firm neared collapse. FRC, the
regulator, did nothing, except commending the company for good accounting
practices months before it imploded. Pensioners’ £ 2.6 b will have to take a
‘haircut’ of some £ 900 m. SME Suppliers will wait for their £ 2 b of bills and
were informed that they could expect 1/100 of their outstanding. 19,000 plus in
the UK and 43,000 worldwide employees (and their families) face a question
mark. UK Parliamentary report said: ‘edifice of corporate governance is rotten
to the core’. A Labour MP in his report said “(the collapse) once again
highlighted the catastrophic failure and inadequacy of our regulatory
system”. The external audit firm was described as ‘complicit’ in the
company’s ‘questionable’ accounting practices and FRC as ‘timid’. The
liquidator firm (another top accounting firm) reported: ‘Unfortunately, as a
result of the liquidation appointments, there is no prospect of any return to
shareholders’. Lawmakers called four auditors involved as a ‘cosy club
incapable of providing the degree of independent challenge needed’. It all
sounds like a classic plot of a typical corporate and accounting failure. The
point is: auditors’ impact on the economy and society, and their sniffing,
barking and challenging, makes a big difference.
Root causes
The problems around audit and auditors are
multi-dimensional and systemic. The major part of the problems revolves around
the following:
a. Shareholder centric and shareholder wealth
maximisation business model
b. Definition of corporate performance and
performance linked executive pay
c. Regulations and Regulatory maze
d. Conflict of interest in case
of audit firms
I wish to leave you
with questions about audit and auditors that I feel require a fresh look:
1. Are auditors commercial entities like other
service providers or are they distinct?
2. Does client / shareholder / majority
shareholder interest supersede public interest as in the present model?
3. Can a ‘reasonable assurance’ be expected to
give ‘insurance’ on components of financial statements?
4. Should ‘scepticism’ be replaced by ‘suspicion’
in the audit lingo?
5. What is the real incentive that auditors have
to stand up and speak up to their clients?
6. Can those in audit practice claim to be
experts in every aspect of company business and provide services or have other
lucrative business relationship with audit clients?
7. How many times can a firm ‘settle’ with
regulators, shareholders, creditors? Does monetary payment wipe the slate
clean?
8. Can the same set of people, who design and
sell tax avoidance schemes with disregard to laws, be entrusted with audit in
public interest?
I was at an
academic seminar in Lucknow recently, where all others, except me, were from
academia – their names had the prefix ‘Dr’. On the last day, a professor from
Kashmir asked me if I considered myself a capitalist. He clearly saw me to be
one – a spoke in the wheel, he said. This was contrary to what I thought of my
work to be as an auditor – that I was protecting the larger public good.
Perhaps, many people do not see the audit profession that way any longer. As a
profession, we have to constantly check our compass and see if it continues to
point to its True North. Every professional will have to judge her needle of
allegiance – to ensure it has not swerved to the magnetic north – but it
continues to point towards the True North of public interest!
Raman Jokhakar
Editor
