Satyam Audit failure - an enlightenment

Abstract: In process of reform and internationalizing, our Institute (ICAI) introduces new/revised sets of Standard’s of Auditing. SA 200*(Revised) “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing” It states the overall responsibilities of independent auditor when conducting an audit of financial statements in accordance with SAs. Stated fundamental principles are;

a. Integrity;

b. Objectivity;

c. Professional competence and due care;

d. Confidentiality; and

e. Professional behavior.

Further SA 240 “THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS” states that, An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.

In recent year, a financial embezzling case has taken place in India (i.e. Satyam fraud). The influence wouldn’t be anticipated. Behind this financial embezzling case, there is a famous auditing firm (i.e. PWC). Why this auditing firm would involves in the financial cases without discovered in time? Why did these huge audit failures take place in famous accounting firms?

Summary; Audit failure means that CA provides error audit opinion for unfaithful financial statements because he or she doesn’t conform to audit standard. Audit risk is the risk that the auditor may unknowingly fail to appropriate his or her opinion on financial statements that are materiality misstated. The main difference of audit failure and audit risk is that CA whether or not conforms to standards of auditing.

Here PWC failed to detect;

• Inflated bill in Satyam Audit failure – an enlightenment

Abstract: In process of reform and internationalizing, our Institute (ICAI) introduces new/revised sets of Standard’s of Auditing. SA 200*(Revised) “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing” It states the overall responsibilities of independent auditor when conducting an audit of financial statements in accordance with SAs. Stated fundamental principles are;

a. Integrity;

b. Objectivity;

c. Professional competence and due care;

d. Confidentiality; and

e. Professional behavior.

Further SA 240 “THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS” states that,   An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.

In recent year, a financial embezzling case has taken place in India (i.e. Satyam fraud). The influence wouldn’t be anticipated. Behind this financial embezzling case, there is a famous auditing firm (i.e. PWC). Why this auditing firm would involves in the financial cases without discovered in time? Why did these huge audit failures take place in famous accounting firms?

Summary: Audit failure means that CA provides error audit opinion for unfaithful financial statements because he or she doesn’t conform to audit standard. Audit risk is the risk that the auditor may unknowingly fail to appropriate his or her opinion on financial statements that are materiality misstated. The main difference of audit failure and audit risk is that CA whether or not conforms to standards of auditing.

Here PWC failed to detect;

• Inflated billing to customers
• Non-existent cash & bank balances $ I bn
• Overstated Debtors $ 100 million
• Operating margin shown high at 24% in Q2 (Sept 2008) as against 3% real profit margin
• Such manipulation done in earlier years( 6 yrs $ 1.2 Bn)
• Increased costs to justify higher level of operations

Factors that contribute to this Audit failure are;

• CA couldn’t carry out audit procedure strictly,
• Professional judgments were error,
• Audit report with a qualified opinion was subsidized by management’s representation.

Analysis of Satyam Audit Failure;

The financial embezzlement in Satyam didn’t violate to auditing system, but manipulated financial data according to accounting system. As long as coincidence with regular, “Wipe the Side Ball” could be used.

Audit is a course that needs a great deal of professional judgment. The reason of this audit failure was mainly that CAs was lack of independence, and they were not able to keep enough professional cautiousness and professional skepticism. In the audit procedure, CA was short of sufficient cautiousness and professional skepticism, and was credulous to explanation of manager. Audit models contain system-based and risk-based audit model. System-based audit is based on internal control system. According to analyzing and evaluating internal control system, it could achieve audit goal. According to the risk-based model, auditing firms used a great deal of energy to analyze trade and management risks of the clients. The control of CA profession includes three factors: self-control, government control and independent control. Different factors had different effects. The independence of self-control is the lowest, independent control is the reverse. The independence is the key to ensure audit quality, and makes public believe auditing firm. The PWC don’t bother looking for fraud. The PWC isn’t comfortable being watchdogs.

Other considerable fact is Satyam's auditor fee, Fess jumped from Rs 92 lakh (as stated in the consolidated balance sheet data) in 2004-05 fiscal to Rs 1.69 crore the next year. But it was in the financial year 2006-07 when PwC's auditing fee shot phenomenally to Rs 4.21 crore. It saw a marginal high in the last fiscal with its fee for the year 2007-08 stated as Rs 4.31 crore. The hike in auditing fee hasn't been as significant in other IT majors such as Wipro and Infosys that too have crossed the crore marks but the jump hasn't been as sharp. On any given year, Satyam's auditor remuneration has consistently been much higher compared to other big IT firms.

Enlightenments;

Auditors obviously play a crucial role in the corporate governance of financial institutions. The clear lesson from the Satyam scam is that the need to adhere the auditing standards and institute’s guidelines more precisely ant to develop the ability to understand and regulate them in audit procedure. Auditors are best placed to detect scams at early stage. All an auditor need to do is;

• Build up effective system,
• Adhere the Standards of auditing and guidelines at paramount level,
• Ensure the independence of audit,
• Plan and perform an audit with an attitude of required professional skepticism,
• Strengthen the training to staff,
• Proper verification of work done by staff.

We encountered such situation earlier also in case of Enron, Xerox, WorldCom but Satyam scam is the first such a big audit failure in India. We also know that frauds are intentional act by management, so it’s difficult to detect it easily but Auditors have a position from which, if they behaved intelligently and correctly, they could prevent a huge amount of all this fraudulent activities.

Prateek kumar Patel to customers

• Non-existent cash & bank balances $ I bn
• Overstated Debtors $ 100 million
• Operating margin shown high at 24% in Q2 (Sept 2008) as against 3% real profit margin
• Such manipulation done in earlier years( 6 yrs $ 1.2 Bn)
• Increased costs to justify higher level of operations

Factors that contribute to this Audit failure are;

• CA couldn’t carry out audit procedure strictly,
• Professional judgments were error,
• Audit report with a qualified opinion was subsidized by management’s representation.

Analysis of Satyam Audit Failure;

The financial embezzlement in Satyam didn’t violate to auditing system, but manipulated financial data according to accounting system. As long as coincidence with regular, “Wipe the Side Ball” could be used.

Audit is a course that needs a great deal of professional judgment. The reason of this audit failure was mainly that CAs were lack of independence, and they were not able to keep enough professional cautiousness and professional skepticism. In the audit procedure, CA was short of sufficient cautiousness and professional skepticism, and was credulous to explanation of manager. Audit models contain system-based and risk-based audit model. System-based audit is based on internal control system. According to analyzing and evaluating internal control system, it could achieve audit goal. According to the risk-based model, auditing firms used a great deal of energy to analyze trade and management risks of the clients. The control of CA profession includes three factors: self-control, government control and independent control. Different factors had different effects. The independence of self-control is the lowest, independent control is the reverse. The independence is the key to ensure audit quality, and makes public believe auditing firm. The PWC don’t bother looking for fraud. The PWC isn’t comfortable being watchdogs.

Other considerable fact is Satyam's auditor fee, Fess jumped from Rs 92 lakh (as stated in the consolidated balance sheet data) in 2004-05 fiscal to Rs 1.69 crore the next year. But it was in the financial year 2006-07 when PwC's auditing fee shot phenomenally to Rs 4.21 crore. It saw a marginal high in the last fiscal with its fee for the year 2007-08 stated as Rs 4.31 crore. The hike in auditing fee hasn't been as significant in other IT majors such as Wipro and Infosys that too have crossed the crore marks but the jump hasn't been as sharp. On any given year, Satyam's auditor remuneration has consistently been much higher compared to other big IT firms.

Enlightenments;

Auditors obviously play a crucial role in the corporate governance of financial institutions. The clear lesson from the Satyam scam is that the need to adhere the auditing standards and institute’s guidelines more precisely ant to develop the ability to understand and regulate them in audit procedure. Auditors are best placed to detect scams at early stage. All an auditor need to do is;

• Build up effective system,
• Adhere the Standards of auditing and guidelines at paramount level,
• Ensure the independence of audit,
• Plan and perform an audit with an attitude of required professional skepticism,
• Strengthen the training to staff,
• Proper verification of work done by staff.

We encountered such situation earlier also in case of Enron, Xerox, WorldCom but Satyam scam is the first such a big audit failure in India. We also know that frauds are intentional act by management, so it’s difficult to detect it easily but Auditors have a position from which, if they behaved intelligently and correctly, they could prevent a huge amount of all this fraudulent activities.

Prateek kumar Patel