Need for public sector audit in listed private companies

Last Updated: Sun, Nov 04, 2012 20:00 hrs

The case made out in this article may sound counter-intuitive given that all along market enthusiasts have been making a case for public sector taking cues from the private sector. However, when it comes to auditing, the public sector in India has blazed a trail.

The crisis of confidence the auditing profession has been suffering from, the world over, is largely due to the incestuous practice of companies finding their own pliable auditors in a life-long marriage of convenience. In such a cozy arrangement, the auditor does not rock the boat by giving a negative report where one is warranted or by spelling out all the qualifications to the integrity of accounts even where they are warranted.

Auditors of public sector companies, on the contrary, are appointed by the Comptroller and Auditor General of India (CAG) from a panel of auditors maintained for a term of five years, after which the company gets a new auditor. Despite the criticism that wrenching away of auditor who has just found his feet is neither good for the company nor for the auditor, the truth is the auditor who is tongue-tied when he makes a report of a private sector company, is refreshingly candid while making the report on accounts of a public sector company.

For a fearless audit report, independence is the key which is guaranteed in case of public sector companies. The proposal in the Companies Bill 2011 (the Bill) mandating rotation of auditor every five years if he is an individual and every ten years if it is a firm with a cooling in period of five years does not go the whole hog because a company in that event would keep two pliable set of auditors each alternating every five or ten years. What is required to restore confidence is roots and branches reforms — the power to appoint being divorced from those who are going to be the object of the auditors’ scrutiny. Sebi is ideally placed to take on the job of administering the panel of chartered accountants.

Another area of auditing where roots and branches reforms are called for is in the role of auditors. Ever since the House of Lords judgment in Kingston Cotton Mills’ case of yore that an auditor is not a bloodhound but only a watchdog, a palpable smugness bordering on perfunctory reporting has seeped into the auditing fraternity. The reports are laconic and confine themselves to the straight and narrow of accounting standards and reporting parameters set out in the applicable laws. Accountants of companies and their auditors, who agonise over compliance with accounting standards, care a fig for propriety aspects of finance and accounting.

The Bill must be lauded for seeking to make the auditor the prime whistleblower but in the absence of adequate powers and help he is bound to end up the favourite whipping boy of all and sundry. L’affaires Robert Vadra-DLF and BJP President Nitin Gadkari have driven home the need for a more focused propriety audit of listed companies where public money is involved. Robust accounts calls for not only compliance with accounting standards but also squeaky clean probity in financial dealings.

The western world’s dalliance with independent directors and audit committees drawn out of the former has not inspired much confidence, with Enron in the USA and Satyam in India happening under their very noses. Non-working directors are best suited for their sounding-board role. They neither have the time nor the inclination for playing the role of whistleblowers. Auditing, including propriety audit, is auditor’s baby. He should be held squarely responsible if directors squander away the resources of the company to feather their own nests through colourable devices and maze of subsidiaries. But authority and responsibility go hand in hand. His hands therefore need to be strengthened. Two things can be done to equip him adequately for this admittedly demanding and heightened role. Secretarial audit must be dovetailed with financial audit. As it is they are done independently and insularly. The brief of a secretarial auditor must be extended to include probe with a fine-tooth-comb into all transactions with subsidiaries and parent.

The second help must come from the official apparatus. It is not enough to expect the auditor to blow the whistle at the first hint of loot or impending loot because even for making a prima facie case he would need the assistance of the Serious Frauds Office or the Central Bureau of Investigation (CBI) if the trail goes off to a distant tax haven with banking secrecy law thrown in. It would be unfair to blame the auditor for being lax in establishing the money trail when it disappears into banks located in nations where his writ does not run.

Public sector audit goes beyond the straight and narrow — performance and propriety aspects figure high.

The author is a chartered accountant

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