Peer review of auditor..

Aisha (Finance Professional) (7667 Points)

09 November 2007  
SEBI in conjunction with ICAI is all set to usher in a welcome change for strengthening the auditing process to be followed by all listed companies. SEBI is likely to amend the listing agreement to stipulate that audit firms who hold a peer review certificate will only be eligible to conduct audits of listed companies.

In the meantime, the government has already constituted a Quality Review Board (QRB) under the Chartered Accountants Act, 1949. These steps will be very positive for improving the quality of audit in case of listed companies and providing greater comfort to small investors and general public.

Auditors of listed companies, pursuant to this upcoming change, will now have to be prepared for a rigorous review by independent fellow professionals. This will lead to strengthening of the audit process and methodology deployed, including documentation of working papers and basis for arriving at conclusions on critical matters. This in turn will ensure that these engagements are appropriately staffed with audit professionals having the necessary skills and expertise.

This is definitely an encouraging step towards improved and credible auditing of listed companies. That said, this measure alone may not have the desired benefit and more would need to be considered.

To start with, the process of peer review will largely depend on the quality of the reviewers. The selection process followed by ICAI for empanelment of the peer reviewers will have to be quite robust and these reviewers should have experience of auditing large companies.

This process is a recent initiative of ICAI and a large number of audit firms are yet to be covered under peer review. The matter of fact is that it is early days to comment on the efficacy of this process and what effectively comes out of it.

SEBI will also have to reach an arrangement with the ICAI whereby the results of such quality/peer review will be shared with SEBI, which may be desirable from a transparency and risk management standpoint. The ministry of corporate affairs, SEBI and Institute must come to an agreement and have one agency for monitoring quality in the audit profession and not set up multiple agencies for the same function.

The quality review must specifically focus on unadjusted audit observations and key matters where exercise of judgement was involved by the auditors. It must also cover how these matters were shared with the audit committee. This will foster greater accountability on corporate management, the independent directors as well as auditors.

The quality of the audit will depend on the quality of the auditor and his relative strengths. A peer review will only be a post mortem review, hence it may be better to adopt prevention rather than cure.

An imperative step in this direction would be on the part of ICAI to ensure that students pursuing the CA course get the right amount of practical training. In order to perform a quality audit, apart from technical knowledge, it is very critical to general management skills besides a deep insight into functioning of large corporate businesses.

Audit professionals need to hone their inter-personal and conviction skills to be able to effectively manage the challenges associated with audits of listed companies and dealings with audit committee and board members. These skills can only be acquired through diligent practical work experience in similar challenging environments.

Clearly, business failures may happen and no regulation can prevent that. However, misappropriation of public money, misstatement of facts and financial results can be avoided with focus on ethical governance and strong auditors’ fraternity. The independence and objectivity of auditors is the key issue, which still remains a matter of personal belief and prerogative. Auditors need to play their role as watchdogs effectively.

Although appointed by the acting promoter management group, their reporting responsibility is towards the public in general, particularly in context of listed companies. The auditors’ role is becoming difficult and challenging, but they will need to live up to these expectations, hopefully with the right kind of legislative support from government bodies.

(The author is director, Ernst & Young India. Views are personal)