pertaining to economic actions. In the light of recent Satyam fraud issues pertaining to the role of Auditors have been raised by different quarters. Is it possible that the auditors of Satyam could have been unaware of what was happening in the company?
Under the Companies Act, an auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the company’s state of affairs and financial position. To formulate such an opinion, the auditor needs to examine the company’s internal accounting system, inspect its assets, test-check of accounting transactions. At all times, auditor has to act with care and skill of a professional of reasonable competence.
Sec.227 of the Companies Act, 1956 prescribes the ‘Duty & Liability of the Auditor’. Statutorily, the Auditor is required to employ reasonable skill & care as with any other person having specialized knowledge. The duty of safeguarding the assets of the Company is primarily that of the management & the Auditor is entitled to rely upon the internal control instituted by the management. He has to take into account any deficiencies he may note therein. The Auditor does not conduct the audit with the objective of discovering all frauds because in the first place, it would not be possible to complete the audit within the time limit prescribed by the law for the presentation of accounts to the shareholders. Further, the cost of doing this would be prohibitive and disproportionate to the benefits which may be derived by the shareholders
An auditor is not concerned with the policy of the company. It is no part of the auditor’s duty to give advice, either to directors or shareholders, about operational aspect of the business. It is not his prerogative to see whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. His business is to ascertain and state the true financial position of the company at the time of the audit.The auditor has a fiduciary relationship with the shareholders of a company. Therefore, he has a moral obligation to see that ensuring that the statements issued are made with the utmost skill safeguards their interests and care and depict the true and fair state of affairs of the company.
Section 233 of the Companies Act imposes a penalty for on the auditors if there is willful negligence and default. In order to hold the auditor liable for fraud, the following conditions must be satisfied:
- that the statement signed by the auditor is untrue and false;
- that he knew it to be untrue either or did not apply reasonable care and skill
- that he intended the report to be relied on by others; and
- that the parties on relying upon the report suffered loss.
The Companies Act, 1956 imposes a Criminal liability on any person who makes a false or untrue statement through any document like balance sheet, profit and loss account, return, prospectus, intentionally, thereby causing a loss to the people who rely on such documents.
The auditor who knowingly doesn’t make a fair and honest report of the company’s financial position in any report, certificate, return, prospectus or other documents, and makes false statements therein is liable.
The shareholders interests are dependent on the degree of care and skill applied by the auditor to draw up an accurate and honest report of a company’s state of affairs. Therefore, the auditors should employ utmost good faith, care and vigilance in the carrying out of their duties. If there is the slightest bit of suspicion of the legality and integrity of a record or transaction, the auditor is under a duty to investigate and report it, before he certifies it to be true.
Now let us come into the issue pertaining to Satyam fiasco. According to the Satyam Chairman’s letter, none of the directors, auditors or senior management knew of what was happening. But a pertinent question is, how can there be fictitious cash and bank balances of more than Rs 5,000 crore without the knowledge of the auditors? Auditors are supposed to independently confirm this with the bankers. For IT companies, revenue comes from contracts in stages over a period of time. There are certain methods of revenue recognition. Client status and billing status details were available. An auditor needs to know how to go about scrutinizing orders and contracts and agreements to figure out how much of revenue will come from a project in that financial year . When Satyam is equipped with sophisticated ERP system, connecting all its processes and systems, it is all the more difficult to accept that that none of the auditors, directors and management had knowledge of the alleged scam.
The shareholders of a company place very high reliance on the auditor’s report, which apparently shows the true and fair view of the accounts of a company. The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. But the recent mishap at Satyam clearly indicates the loopholes in the system. So the need of the hour is to re-examine the present system to strengthen and intensify internal audit system. The mandatory appointment of dual Auditors system as envisaged by ICAI is a right step towards right direction as it would induce more check and balance in the system. Moreover, appointment and remuneration of auditors should not be left to the companies they audit, as the fees can easily influence the auditors report. A better option would be to pool in money and hand it over to the stock exchanges that can appoint auditors. Forensic auditors should be used to unearth evidence of wrongdoing. For this purpose a pool of professionals may be drawn from the police or the CBI, lawyers and audit professionals with an objective approach. Therefore, the Government must take appropriate steps to prevent the further deterioration of already deplorable conditions. Timely precautions can only prevent the occurrence of another ASATYAM saga.
Syed Burhanur Rahman, Attorney, New Delhi. E [email protected]
Syed Burhanur Rahman is an alumnus of St. Stephen’s College and Campus Law Center, Delhi University. A Quiz aficionado, he has featured in premier T.V Quiz shows including Mastermind India(BBC),University Challenge Quiz(BBC) and Nat Geo Genius Quiz (National Geographic Channel).An Attorney working with INDUS G & D Law(Delhi),his practice areas include Corporate Law, IPR and Taxation Law .
