Financial Daily from THE HINDU group of publications
Thursday, Jul 04, 2002
Get on board
Mohan R. Lavi
ACCORDING to news reports, almost 1,000 American companies have restated their accounts since 1997, which gives a good indication of the extent of erroneous and misleading numbers published by companies in the US. Enron, Waste Management, Peregrine Systems, Tyco, Adelphia,WorldCom were the big names in this list. Even the much-revered GE has come under this umbrella. One wonders how many more surprises there are in store. There is this joke in one of the Big Five firms: "CPA expands as cleaning, pressing and altering". In the current context, this appears to be a reality.
It is surprising that the revelations about wrong accounting practices appear fairly simple misusing off-balance-sheet vehicles (Enron) and capitalising revenue expenses (WorldCom). These should have come to the notice of any auditor, leave alone the Big Five. The auditors, it appears, are guilty of negligence, whether by oversight or by connivance is another matter. There appears to be a yawning gap in the implementation of the US GAAP provisions. A lot of dust appears to have accumulated on the public image of auditors.
As expected, action is being taken to stem the tide. Recently, a Senate Committee approved a draft legislation the Sarbenes Bill. This Bill provides for the creation of an independent oversight board to set audit standards, punish miscreant auditors, and limit the consulting and non-audit work that accounting firms can undertake. The board consists of two retired accountants while the rest are not from the accounting field at all. Big firms have vainly attempted to prevent this legislation from becoming law.
Simultaneously, the SEC, under the stewardship of Mr Harvey Pitt, has formed a Public Accountability Board. This board would have mandatory funding from audit firms. The board has the power to punish accountants with fines and public censures, remove them from audits, forbid them to work again on public companies. The SEC is also proposing new changes to its rules on auditor independence, which could include new limits on non-audit services.
The fact that two bodies are working independently to stabilise the accounting profession in the US is a reflection of the urgency of damage control in action. The US is not the only country in trouble. Earlier this year, in Germany, Comroad, once a darling of the Xetra Dax, collapsed. It appears that all revenue billings of this company were to a non-existent client in South-East Asia. One of the Big Five was the auditor.
The fact that basic and simple facts of accounting were ignored to result in large-scale accounting misstatements brings to the fore the need for a quality check on audit. Worldwide, accountants have been controlled by local bodies which invariably set standards for their members. It is assumed that the members follow these dictates while discharging their function.
However, conniving companies have managed to get around these standards dubiously. Since the auditor certifies the statement, members assume that the accounts are true and fair. The question is: Who do you blame, the company or the auditor? The most likely answer is both. As a result, the responsibility on the auditor to discharge his duty with full faith and integrity becomes paramount. What has happened in the US can be traced to one of the prominent bugbears of the US economy a plethora of excesses. Because of this malady, either companies flourish or flounder. They do not survive.
The situation in India is slightly different. It would be foolhardy to expect companies such as Infosys, Wipro, Reliance, Tatas, and so on, to collapse suddenly.
To that extent, one gets the satisfaction that Indian auditors are more reliable than their counterparts abroad. In the same breath, it can also be said that the cream of Indian management has respectable value systems. If one looks at the scams that have hit the Indian scene Harshad Mehta, Ketan Parekh, Krushi Co-operative Bank, and so on the immediate thought that comes to mind is that these were outside the purview of qualified auditors. However, there have also been instances of neglect, as in Fairgrowth Financial Services, CRB Capital Markets, the proliferation of low-quality NBFCs, and so on. The symptoms of scams in the making here were imminent overstretching financially (Fairgrowth) and obtaining loans against non-delivered securities (co-operative banks). The fact remains that nobody saw the writing on the wall and even if they did, they preferred to remain silent.
The Institute of Chartered Accountants of India, in the recent past, has vigorously issued many new Accounting Standards to enable members to discharge their duties. It has also constituted a peer review system by which members verify quality of audit work amongst themselves. Disciplinary action against errant members is being strengthened.
Members are being asked to attend professional development programmes so that they do not miss out on important developments. However, it should be stated here that policing own members is welcome, but restoring public confidence in the profession requires a lot more.
Also, as has been said earlier, the irregularities noticed in the Indian systems were largely in areas that have not been under the jurisdiction of professional auditors. But it would not be sound to shrug off the responsibility.
To restore public confidence in auditors, it is imminent that a board on the lines of the Public Accountability Board in the US be set up. This board must be manned by an elite group of professionals, a few on whom only need be qualified auditors. The rest of the board could comprise professionals from different walks of life.
The board must have powers to audit accounts of companies, banks, co-operative banks, stock exchanges et al. Staffed with quality personnel, it should be empowered to levy fines on errant auditors and censure them. The findings of the board should be available publicly. The board can function in co-ordination with all the accounting institutes in the country.
Time has come to clear the mirror of the accumulated dust to present the true image of auditors to the world free, fair and frank. The earlier this is done, the better.
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