Independence of Auditors
[Submitted by Mr. V. Rajagopal,
FCA,
Chennai]
July 15, 2006
Introduction
Independence of auditors is a must for the success of the audit system. The law in which an auditor is appointed gives independence to auditors. In practice the consequences of being independent affects the independence of auditors.
What is independence?
The audit should report the truth with out fear and favour. Who and what have to give the courage to auditors to carry out the audit without fear and favour? The law in which an auditor is appointed gives that courage. If so where is the question of independence to auditors? The independence is in the hands of the auditors. As long as the auditor is strong in his mission his independence will not be affected at any cost. In practice is it working out? Small firm fears about the loosing the basic income and big firm fears about loosing a part of luxury.
Appointment of auditors
Auditors are appointed not by any independent agency. In case of companies the share holders are appointing the auditors. But in practice the management of the company having deciding share holding decides the choice of auditors. The auditor is concerned about the renewal of his appointment. To get renewal he pawns his independency in many cases. This is the reason the president and many members of our institute feels that the appointment of auditors by the management of bank for the audit of the bank shall continue to be with RBI and not with bank management. The same principle can be implemented in case of companies also to make the audit more effective. This will give opportunity to young members, members not having connection and members belonging to the SC/ST/OBC community. In practice the large corporate audits are with few audit firms. Many members in practice don't get a single chance to audit large companies in their life time.
What is really going on?
Earlier president Mr. Ashok Chandak had this to say:
"Don't some accountants connive with managements of companies to give wrong information?
May be some do. But many companies tell the auditors that their job is to conduct audits and tell them what is not correct, that they should stick to making comments or qualifications only-and nothing more. So, then, it's for the company to prepare the accounts; the auditor's brief is to give his comments and make qualifications. Unfortunately, only two people read these comments and qualifications- the CFO (chief financial officer) of the company, who has to explain them to the directors, and the auditor who has written the qualifications."
Few ways to enhance the independence
One of the suggestions made by the ICAI is that the auditors remuneration should be fixed by the Act itself, than by the management of the companies, which will in a way enhance the independence of the auditors. Another suggestion is to consider the effect of the qualification in the auditors report, while finalizing the remuneration package for the directors of the company and also at the time of declaring the dividends. The systems of separation of consultancy activities from the core audit activities should be implemented in full, as the offer of fees for the consultancy activities are being made by the managements of the company and can be source for lack of independency by the auditors
Who is the right person to appoint auditors?
The appointment of auditors in case of banks, insurance and public sector undertaking by RBI and C& AG is not effective. They follow certain norms followed in case of tendering by Govt. in allotment of audits. They don't have a faith on individual CA with talent and experience to mobilise man power to conduct audit if need arise. They discriminate junior member and small firms. They rely on the data provided by the audit firms about its partners and staff. They do not check the correctness of the data provided by them and they rely on ICAI. In turn the ICAI rely on the data provided by the members. So ICAI will be the better organ to appoint auditors provided it is having mechanism to check the correctness of the data provided by their members.
Our Institute is the right person to act as an organ for appointment of auditors.
Independency and opportunity
The auditor has to depend on renewal of audit if he is not having enough income. The members should not depend on audit and tax practice alone. The institute shall publish the capabilities of CAs in media. Members shall raise their image by faithful to the society. The institute shall conduct the course similar like business schools. The image of members as just accountant, auditor and tax practitioner in the minds of the corporate shall be the changed. They shall recognize the members as good business managers. The new opportunity in BPO/KPO sector requires large funds. The institute shall constitute venture capital fund to help CAs to meet their capital needs. More opportunity will result in to more income and it reduces the dependency on renewal of audits.
Consequence of being independent
The chartered accountants are in fact can over come the problem in the system of appointment of auditors and the earning capacity in the manner mentioned else where. The real threat comes from the consequence of being independent. The institute shall encourage the members to come out with their experience in being independent in their assignment. No body comes to the rescue of auditor being independent. There is no avenue available to auditors to present his case. Institute doesn't entertain the member's complaints. He is to fight the mighty company as a single man army. Even a consumer buys goods a rupee get protection by way of consumer forum. But auditors don't get any support from any quarter. ICAI is ready to accept complaints from companies against the auditors but not fight for auditor who was harassed for being independent in audit. The kind of support the legal profession they get from their Bar Council/ Association is not available to our members. The members got affected by this alone can come out the miseries he had experienced. The consequence of being independent is the main obstacle for exercising the independence of auditor.
Conclusion
Whatever the measures taken to establish the independence of auditors, the real independence is in the hands of the auditor. He is given independence by law. He is in the wise profession. He should assert his power. He should be very careful in his finding and firm in his finding once he is convinced that his finding is correct. No looking back. Nothing can affect his independency. The great Tamil poet rightly said this as 'be bold in your decision and it is shame if you reverse it" "Enni thuniga karummum, thunintha pin ennuvom enbathu ilukku"
