Confessions of auditors

Big four 1378 views 3 replies

CA CS CIMA Prakash Somani

Landmark Group

23512 Points Joined July 2007

Three auditors reveal to BT, the dubious nexus between auditors and corporate management.

Confession 1

I had always fancied becoming a practising chartered accountant. The enormous responsibility that is bestowed upon an auditor awed me. In fact, no other career ever crossed my mind after I came to admire auditors. After completing my BCom, I joined a well respected audit firm in Chennai which has been in existence for over 40 years with a strong Income Tax and Corporate practice. The first couple of years were fun as I assisted my seniors in auditing various types of companies. Company Law particularly attracted me and soon that became my area of expertise.

It was only after I became senior enough to finalise the audits of major companies and banks on my own did the reality sink in. A few years ago, we (I and a team of 10 junior auditors) had just completed the statutory audit of a large bank. The audit brought up a large quantum of non-performing assets (NPAs) provisioning, which would result in the bank posting a loss. The bank management was terrified and kept providing last-minute documentations to reduce the NPAs which were against the norms. My auditor, to my utter shock, went along with them, knowing fully well the management’s attempts to window dress the accounts.

In the end, the NPAs were suitably diluted so as to enable the bank to post a marginal profit.

In another instance, I was given the responsibility of auditing a diversified group. During the course of the audit, we realised that the related party transactions (between group companies and partnership firms run by the promoters) were not adequately disclosed as per the provisions of the Companies Act. Transactions that were of significant value were not done at market price between the company and group firms. Also, the dues to the company from the group firms remained unpaid. In a way, a company with public shareholding was funding the operations of firms run by the promoters and their family members. This was disclosed in the initial report that I prepared after the audit. But the final report made no mention of it.

I qualified as a CA even as my three-year training came to an end. Every one in the audit firm, including the partners, thought I will join them, but by then I had lost all respect for the profession. I left the firm to take up a corporate job—a role where I have nothing to do with audit or an auditor.

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CA CS CIMA Prakash Somani

Landmark Group

23512 Points Joined July 2007

Confession 2

I had taken up a plum position at one of the Big Four accounting firms. They had placed me at their office in a BRIC (Brazil, Russia, India, China) country. It was to be a new world, a new job, a new life. The excitement was hard to contain.

One of the first audits assigned to me was of the accounts of an auto major. Its operations in this country were sizeable. The portfolio of investments ran into thousands of crores of rupees. At some point during the audit, I found that as much as a quarter of the advances this company had been extended were unsecured, meaning no securities backed them. This immediately raised a bright red flag in front of me.

Unsecured advances remain harmless for as long as nothing happens. If there is a mishap, they lose value, causing catastrophes. The minimum stipulated disclosure requirements had not directed the balance sheet or the audit to reveal distinctly, the exposure to unsecured advances. A complete picture of the risk on the balance sheet, however, was required, especially since the amount was huge. As auditors are free to raise the bar on disclosers above the stipulated minimum for the benefit of society at large, I decided to include the break-up in my notes in the audit. The company, however, disagreed. Following lengthy discussions, my boss, who was the partner due to sign the audit report, overruled me.

Unaware of the risk, several investment companies that raise deposits from the public securitized the advances. A meltdown could have completely wiped out their equity bases. The hiding of the information by the company and the auditor, though not illegal, was unethical. I quit the job and returned India where I run my own audit practice.