Banking and market regulators are considering a proposal authorising auditors to directly verify financial information of their clients with banks where they hold accounts, a person familiar with the situation told ET.
Currently, rules of the Institute of Chartered Accounts of India require auditors to physically verify the cash and bank balances of companies they audit, and not merely rely on statements provided by the company secretary or the chief financial officer. However, banks are currently under no legal obligation to share such information with auditors.
A key contributor to the Rs 7,000-crore accounting fraud at Satyam Computer was auditors not verifying bank account statements and fixed deposit certificates of the company with the respective banks. The IT firm allegedly supplied incorrect information to its auditors about available cash balances by forging the letterhead of one of its banks.
Once the proposed new rules are in place, the Reserve Bank of India and the Securities & Exchange Board of India (Sebi) will make it mandatory for companies to reveal details of their banking arrangements and for banks to share the account details with auditors. It is learnt that Sebi is planning to incorporate this in the listing agreement between companies and stock exchanges.
The issue is likely to come up for discussion at the next meeting of the Sebi Committee on Disclosures & Accounting Standards (SCODA), the person involved in the process told ET.
“Auditors do not have any relationship with banks, nor are banks legally bound to provide information sought by auditors. Broadly speaking, we do not get response from at least 30% of banks. Some companies misuse the system by ‘organising’ information from their banks,” said a person who works with one of the Big Four auditors. But banks claim they are not to blame.
“It’s not that banks don’t cooperate with auditors in this process... Sometimes, banks also seek a confirmatory letter from the company that this information has to be provided. On many occasions, letters seeking confidential information are addressed to the wrong person in the bank. All these practical issues may delay the response sought by the auditor,” said a senior banker with one of the leading private sector banks.
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