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)
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