The Punjab National Bank (PNB) scam involving Rs. 11,400 crore became public about a fortnight back and still continues to be in focus in the media, both electronic and print. Apart from PNB fraud, instances of frauds are being reported in other banks as well. Multiple investigating agencies have suddenly woken up and have started investigations. Premises of companies directly connected as well as related entities are being raided, properties are being seized or attached and several persons have been arrested, while the main players have already fled the country.
The Finance Minister, Mr. Arun Jaitley, while speaking at the Economic Times Global Business Summit, said ‘(there are) at least multiple layers of auditing system which either chose to look the other way or do a casual job’. He blamed the bank management, the regulator and the auditors. However, as the Minister under whom the regulator and the banks operate, he was not ready to accept any responsibility. He, in fact, said politicians are made accountable while regulators are not. He seems to have forgotten the political interference in the functioning of banks, particularly in sanctioning of loans. Reserve Bank of India has described the fraud as `a case of operational risk arising out of delinquent behaviour by the bank’s employees’. Others have called it a ‘system failure’.
Mr. Jaitley’s remarks, particularly blaming auditors, have generated sharp reactions from the profession. Mr. Jaitley, while blaming the auditors, did not consider the third possibility that the auditors did their job as was required of them, but yet the frauds happened. Obviously, in such a case the auditors cannot and should not be accused of ‘looking the other way’ or ‘doing a casual job’. However, the fact is that whenever there is rise in crime or atrocities against women, do people not ask “What was the police doing”? On the same logic, when there are massive frauds in the banks carried on for years, is it unreasonable if stakeholders question the efficacy of the audit process?
As a profession, we cannot do what Jaitley brazenly did – refuse to accept any responsibility. On the other hand, we need to look into increasing the effectiveness of audits. If the profession cannot provide a reasonable assurance as expected by the stakeholders, the future of the profession itself would be at stake.
It is surprising that the Letters of Undertaking issued through SWIFT messaging did not form part of the Core Banking Solutions (CBS). Reserve Bank of India had issued instructions to the banks pointing out this weakness, but it appears no follow up was done. None of the audits appear to have even considered this and consequently felt the need to modify their procedures to check the transactions. It is surprising that foreign branches of the Indian Banks in whose favour LoU were issued did not realise that these were not in accordance with the guidelines of the Reserve Bank of India. All these questions and many more need answers. At this stage, one can only hope that the enquiry is swift (pun not intended), thorough and impartial.
While the blame game is on, the Reserve Bank of India has appointed an Expert Committee. It is a matter of pride that the Committee is headed by a senior chartered accountant – Mr. Y. H. Malegam. The Committee will, inter alia, look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and the steps needed to prevent it.
Today, audit assignments have become rather onerous. The businesses have grown manifold in size, operations are spread across nations and have become extremely complex. Add to that the changes that take place with great speed in the nature of business. There is pressure to complete the audit within a short period and to keep the cost of audit low. Accounting standards have become complex and are changing rather frequently. Pressure on managements to show progress quarter on quarter has increased the chances of manipulation of the financial statements at the instance of those charged with governance. In this scenario, auditor has an unenviable job to do.
Traditionally, where volume of transactions is large, auditors have depended on sampling techniques, including some rather sophisticated ones. Possibly, with data analytics, artificial intelligence, machine learning, the way we carry out audit may further change substantially in the future. With technology, the auditor will be able to draw far better conclusions than those based on sample checking. Machine learning may lead to development of models for predicting accounting frauds and possibility of the misstatements in the financial statements. Technology will not only be able to process a very large amount of data, but its true potential is in its ability to predict risk and future events. The auditors will have to be far more tech savvy, employ specialists and draw conclusions based on data processed using modern technology.
Internationally, businesses have started experimenting with artificial intelligence and machine learning. The professions have also started making large investments in these new technologies. It may take a while for smaller firms to be able to afford the use of these technologies. But, the past experience indicates that what was thought rather unaffordable, has, in a very short period, become easily affordable. DVD writers, mobile telephony, Internet are just some examples of technology becoming affordable.
But in spite of technological developments, one will still have human ingenuity, which will try and beat the system and we will have another scam like that of Harshad Mehta or PNB!! Let us hope that the profession in the meantime enhances its skill sets so that it can play a role in mitigating such risk.
