Auditing The Auditors: Drawing The Line On Corporate Fraud Accountability

The move by NFRA is to ensure that audit firms do not deviate from stipulated standards, but help prevent fraud and uphold the standards of corporate governance and ethics to help the cause of all the stakeholders of a corporation.

With a fast-growing economy, unprecedented growth and valuations of startups, especially unicorns, and the globalisation of Indian companies, there is pressure on the corporate ecosystem to be transparent and be on par with global firms.

While corporate frauds have been on the rise since the Satyam Computer Services Scam in 2008, in recent years they have reached a new high. The most high-profile one of late involves an IL&FS subsidiary and its then directors for allegedly cheating 19 banks of Rs 6,524 crore.

There is a need to fix accountability in auditing lapses in cases like these.

Set up in October 2018 under the Companies Act, 2013, in the backdrop of the US$ 2 billion fraud case related to the Punjab National Bank, the NFRA typically recommends accounting and auditing standards to companies and enforces compliance. It can act against auditors of listed and large unlisted public companies if professional lapses are found.

Before its establishment, the auditing profession was self-regulated by the Institute of Chartered Accountants of India (ICAI) and it had the sole authority to discipline auditors. However, experts say, it was felt that the ICAI was not doing its job diligently.

The NFRA was created along the lines of the American Public Companies Watchdog Accounting Board and the UK’s Financial Reporting Council.

Spotlight On Auditors

There is a concentration of audits with the Big Five (EY, KPMG, Deloitte, Walker Chandio & Co and PwC) and their associates. According to several reports, thesefive major audit firms handle two of every three audits of the Nifty500 companies. The monopoly of audit with the Big Five should not lead to any abuse of the system.

At the same time, auditors are resigning from companies where they see non-cooperation from companies. For example, Deloitte last year quit two companies, Byju’s and Adani Ports, and PwC from One97 (Paytm).

A Delhi-based chartered accountant who did not want to be named said, “There is a lot of mismanagement on the side of the companies. One of the main ways of fraud these days is funnelling out of funds from the companies to overseas accounts through layers of shell companies.”

“There are instances where these are done in connivance with auditors. Sometimes, frauds do not get the attention of auditors because I believe that the audit period of a month or two is too small to do the work, especially in large firms”.

The Way Forward

Companies and auditors are likely to be more careful in the future because several promoters of companies like Unitech and Dewan Housing Finance Limited (DHFL) have been jailed. This could be a deterrent.

The legal overseers are also getting into the picture. For example, last year the Supreme Court allowed the Serious Fraud Investigation Office (SFIO) to launch criminal proceedings against BSR & Associates LLP and Deloitte Haskins and Sells LLP in connection with the fraud case of IL&FS.

The larger audit firms are increasingly using technology to make the audit more thorough. Also, they are setting up in-house research teams and also outsourcing research to dedicated firms to avoid any gaps on their part. One such firm in Delhi is the ‘Auditors Desk.’

“The government is serious. Even though it has now been announced that NFRA will begin annual audits of the Big Five firms, we hear that they will soon move to the next level of large firms like Grant Thorton. On our part, we are very wary and careful of how we do it,”said a partner of another NCR-based mid-level audit firm.

Globally, there have been attempts by EY and Deloitte to split their auditing and consulting businesses into separate entities. One of the reasons for this was to de-risk the entire company. EY abandoned the move at the last minute. However, this is not the last word on this.