Role of an Auditor.

5 CLAPS
0
Audit involves with the task of the verification of accounting data and with determining the accuracy and reliability of accounting statements and reports.

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 from Price Waterhouse Bangalore could have been unaware of what was happening in the company? 

An auditor is required to conduct an independent review of the financial statements and offer 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 achieve this goal, the auditor needs to examine not only the company’s internal accounting system but also to inspect its assets and review the accounting transactions. It involves testing the reliability, competency and adequacy of evidence in support of all transactions. 

Sec.227 of the Companies Act, 1956 prescribes the ‘Duty and Liability of the Auditor’. Statutorily, the Auditor is required to employ reasonable skill and care as with any other person having specialized knowledge. The duty of safeguarding the assets of the Company is primarily that of the management and 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 not a 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 and ensure that the statements issued are made with the utmost skill, safeguards their interests and depicts the true and fair state of affairs of the company.

The Institute of Chartered Accountants of India, in its statement of Standard Auditing Practices ,identified the basic Principles governing an Audit has listed certain principles for independent audit of financial information. These principles are as follows:

  • Integrity and independence.
  • Confidentiality
  • Skills and competence
  • Responsibility
  • Accounting systems and internal control
  • Planning
  • Evidence and documentation.

Section 233 of the Companies Act imposes a penalty on the auditors if there is a willful negligence and default on their part. In order to hold the auditor liable for fraud, the following conditions must be satisfied:

  • that the statement signed by the auditor is not true;
  • that he did not apply reasonable care and skill; and
  • that the parties, on relying upon the report of the Auditor, suffered loss.

Now after talking about the duties and liabilities of the Company Auditor, let us come to the issue pertaining to the Satyam fiasco. It is true that an Auditor is a “Watchdog” and not a “Blood Hound” .But that “Watchdog” needs to be vigilant and bark when it sees the suspicious activities in the company. How can there be fictitious cash and bank balances of more than Rs 5,000 crores without the knowledge of the auditors? Auditors are supposed to independently confirm this with the bankers. Auditing is an examination of account kept for and on behalf of an organization with a view to authenticate the periodical account with the help of Books of Accounts and the original vouchers and documents. It befuddles us how Satyam’s Auditors failed to scrutinize orders and contracts .The original vouchers and documents would have given them the clue regarding the revenue flowing from projects in that financial year . When Satyam is equipped with sophisticated Enterprise Resource Planning system, connecting all its processes and systems, it is increasingly difficult to accept that none of the auditors had any inkling of the alleged scam.

The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. They should not confine themselves merely to the task of verifying mechanically the arithmetical accuracy of the balance sheet, but to ascertain that it was properly drawn up to contain the correct representation of the state of company’s affair. 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 plug the loopholes and strengthen the internal audit system. The mandatory appointment of dual Auditors system as envisaged by ICAI is a right step towards the 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. 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 mail- syedburhanurrahman26@gmail.com .

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 .

Latest

Updates from around the world