Auditor's accountability

Srinivas Talluri and S Gopalakrishnan, the two auditors responsible for auditing Satyam Computer’s fake accounts, languished in jail. But the audit firm that they represented, PricewaterhouseCoopers (PwC), continues to have some of the bluest of blue chips on its client list. Had Ramalinga Raju, Satyam’s founder, confessed to fraud after the new Companies Bill was passed by Parliament, it is likely that PwC would have suffered much heavier consequences than the regulator’s scrutiny. At least that is what the Union ministry of corporate affairs would like to ensure. Although auditors and their representative institutions are likely to object, there is some merit in this proposal. Two issues arise in this context, both from the Satyam case, which has proved a landmark in India on the question of the role of the auditors. First, whether the individual auditor’s responsibility for the veracity of its client’s accounts is distinct from the audit firm’s responsibility. And second, whether auditors and their firms can be held culpable for certifying accounts of a firm in which the promoter has provided fraudulent documents.Either way, it is difficult to see how a firm can escape censure. Unlike conventional companies, law and accounting firms that follow a partnership model are a sum of their parts. This is implicit in their work of acquiring and retaining clients and ensuring their audits are conducted accurately. If, say, a tyre maker is held liable for faulty products, the courts are unlikely to deem only the factory workers in the production process liable. As the face of the firm, therefore, there is some logic in not distinguishing between the partner and the firm. This argument strengthens in the Satyam case too. For one, one of the two auditors jailed for the Satyam fraud, Mr Gopalakrishnan, was involved in the fiasco over the Global Trust Bank (GTB) in 2003. At that time, Mr Gopalakrishnan was one of several auditors with PwC associate firm Lovelock & Lewes that certified that the bank had a net worth of $80 million for FY 2002. When the bank went under as a result of collusion with stockbroker Ketan Parekh, a Reserve Bank of India (RBI) investigation showed that GTB had a negative net worth. The RBI then complained to the Institute of Chartered Accountants of India, which conducted a long-drawn-out investigation that eventually wound its way through the courts, and the central bank barred Lovelock & Lewes as commercial bank auditor for three years. On the issue of audit companies being vulnerable to promoter shenanigans, the equal responsibility proposal in the Companies Bill will go some way towards strengthening accountability and raising vigilance. PwC has made much of the fact that Mr Raju provided it with the fraudulent documents on the basis of which its partners signed off on the accounts. In future, it would be required to be more diligent in its work. True, auditors, like independent directors, undertake a huge risk because they are dependent on good faith disclosure. Even assuming there was no connivance – indeed, this is yet to be proved – it is difficult to escape the conclusion that the guardians of shareholder interest were unacceptably sloppy. At the very least, the firm that employed such poor talent must surely be responsible for poor due diligence in its hiring(July 27, 2011)

SOURCE: Business Standard