Striking a balance: Adani Ports-Deloitte incident puts focus on auditing practices
August 16, 2023
The Adani Ports-Deloitte incident is a catalyst to debate the extent to which auditors should verify related party trans actions and take up group company audits in conglomerates.
Audit function, a critical pillar of corporate governance, is one that continually challenges professionals to navigate a delicate equilibrium. The recent incident involving Adani Ports and Deloitte brings to question as to what extent auditors pursue for ensuring transparency and accuracy of related party transactions and group company audits while maintaining their independence and objectivity. Deloitte had issued a qualified opinion on the FY23 annual accounts of Adani Ports after auditing the company for six years and shareholders had approved the FY23 accounts at the AGM on August 8, 2023.
Related party transactions are business dealings between a company and one of its related parties. Related parties can include parent companies, subsidiaries, sister companies, affiliates, and individuals or entities with significant influence over the company. Related party transactions are often complex and opaque, making them susceptible to abuse. For this reason, it is important for companies to be transparent about these transactions and to ensure that they are conducted at arm’s length and in accordance with applicable laws and regulations. Auditors play an important role in verifying related party transactions. They assess whether these transactions are conducted at arm’s length and in accordance with applicable laws and regulations. They also ensure that the company’s disclosures about related party transactions are accurate.
The revelation that Deloitte had sought for audits of other Adani Group companies, which subsequently led to its withdrawal from the engagement at Adani Ports, raises pertinent questions about the boundaries auditors must observe. The principle of arm’s length transactions is fundamental, ensuring transactions between related parties do not compromise the integrity of financial reporting. However, the extent to which auditors should become involved in auditing group entities is a matter of careful consideration.
These days, auditor firms seem to want package deals. After the IL&FS episode of 2018 where, because of one audit firm, all other auditors of IL&FS group companies were also dragged into the NFRA regulatory censure, big audit firms now want maximum possible coverage to get comfort at group or consolidated level and also get remuneration commensurate with the time spent and the risks.
On the one hand, it is important for auditors to be independent and objective in their assessments of financial statements. This means that they should not be involved in any transactions that could potentially create a conflict of interest. Auditing both sides of a related party transaction could be seen as a conflict of interest, as it could give the auditor an undue influence over the transaction.
On the other hand, it is also important for auditors to ensure that related party transactions are conducted at arm’s length and are in compliance with regulations. This means that auditors need to be able to gather sufficient evidence to assess the fairness of these transactions. In some cases, this may require auditors to have access to information that is not publicly available. The Adani Ports-Deloitte incident suggests that there is no easy answer to the question of how auditors should balance these competing priorities.
Auditors are not meant to be investigative bodies. Their primary role is to provide an unbiased assessment of a company’s financial statements. This means that they must be free from any undue influence that could compromise their judgment. Auditing both sides of a related party transaction could lead to conflicts of interest, raising concerns about the impartiality of the audit process. However, it is also important for auditors to be vigilant in their scrutiny of related party transactions. These transactions can be complex and opaque, and there is always the risk of them being used to manipulate financial results. Auditors must therefore have a strong understanding of the company’s relationships with its related parties, and they must be able to identify any potential red flags.
The profession of auditing operates within a well-defined framework of regulations and standards. In this context, the suggestion to audit both sides of related party transactions contradict the guiding principles of accounting standards and the provisions of the Companies Act. These regulations emphasise the importance of auditor independence and transparency, advocating for a clear distinction between the roles of an auditor and the parties involved in the transaction. The Sebi proposals for new set of disclosures for conglomerates will have to consider this stance taken by the auditors.
The Adani Ports-Deloitte incident serves as a catalyst for an important discussion surrounding the extent to which auditors should verify related party transactions and take up group company audits in conglomerates. While transparency, disclosure, and accountability remain paramount, auditors must strike the right balance between their involvement and maintaining their independence. The notion of auditors as watchdogs, rather than bloodhounds, underscores their role as custodians of financial integrity. It is imperative that auditing practices remain aligned with established regulations and standards, reinforcing the integrity of financial reporting and corporate governance.
[The Financial Express]
