Greater scrutiny, lack of procedural clarity turn auditors wary of some clients

Veteran auditors at major audit firms told the Indian Express that there was a sense of uncertainty among auditors on procedural expectations from regulators.

“There is a serious concern and uncertainty across the audit profession as recent orders by the NFRA have set new expectations and interpreted compliance with laws and standards in what some professionals believe is different from the past without first setting out expectations and holding the profession accountable to the new NFRA expectations,” said PR Ramesh, former chairman, and partner at Deloitte India.

Citing an example of the lack of clarity on procedure, Ramesh said that auditors had long sought clarification from regulators on what qualified as management services which they are not allowed to provide to clients, an issue which has cropped up in one of the recent orders by the NFRA barring an auditor for seven years. He noted that the NFRA has classified certain advisory services as management services in recent orders, which was not in line with international standards.

“Professionals have thus far been following what is laid out by the ICAI (Institute of Chartered Accountants of India), the IAASB (International Auditing and Assurance Standards Board), and the QRB (Quality Review Board). Professional bodies globally and in India have not found anything seriously wrong in these procedures to which the NFRA has now objected,” said Ramesh, who is also a member of the committee on enhancing audit independence formed by the Ministry of Corporate Affairs.

Sudhir Soni, national director and partner—assurance services, SR Batliboi & Co, said that auditors were concerned about the possibility of the imposition of disproportionate penalties by regulators.

“There is an issue of proportionality of liability. While an enterprise being audited may be liable to pay a penalty or is able to compound its offence, the auditor could be barred from providing audit services leading to large-scale disruption for its other clients and for employees of the audit firm,” said Soni.

He suggested that regulators consider penalties, such as increased supervision of firms and restrictions of new clients and financial penalties based on the fees charged by auditors, unless an auditor is proven to be complicit in fraud.

Experts also noted that audit firms are being more careful in selecting clients and are avoiding taking clients from certain industries that are considered to be at high risk for default, or likely to have multiple layers of transactions for which audit evidence is unlikely to be available.

Kaushal Kishore, partner at BSR & Co, said that enhanced scrutiny on auditors had led to increased due diligence by audit firms before they accept clients. “There is an enhanced focus on diligence while accepting a client for the purposes of audit. Auditors certainly do not intend to work with anyone having governance issues and hidden agendas,” he said.

Ramesh also said that auditors were now avoiding taking on companies in high-risk industries, high default risk and high levels of debt, adding that auditors were also wary of taking on clients “where there could be challenges in valuations, obtaining convincing audit evidence, as well as companies with multiple subsidiaries in other jurisdictions as the auditors may not have visibility on utilisations of flow of funds which they may be questioned on.”

Another senior auditor, who did not wish to be quoted, said that auditors were avoiding taking clients from industries such as real estate, gems and jewellery and NBFCs as these clients were perceived to be high risk.

Experts noted that there was a major gap between what regulators and investors expect from an auditor and what a statutory audit entails.

“Auditors are working under an audit framework and not an investigative framework. In a normal circumstance, identifying fraud is not an auditor’s responsibility, unless there is an indication of fraud based on normal diligence,” said Kishore., noting that expectation of stakeholders from an auditor may not be met in case of management collusion or a perpetrated fraud.

Experts did note, however, that the new Companies Auditor’s Report Order (CARO) 2020, which is set to be implemented for FY21, would likely help bridge the gap between stakeholder expectations and current audit standards.

“CARO 2020 is bridging the expectation gap with regards to the role of auditors by requiring auditors to qualitatively comment on areas such as investments made and loans given by the company, ability of the company to meet its short term liabilities, enhanced disclosures on fraud including attention to whistle-blower complaints and compliance with some of the important financial regulations,” said Soni.

Ramesh also said that the increased scrutiny on auditors was making it difficult for the profession to attract high-quality talent.

“This situation can affect quality. It has become more challenging to attract good people who think that the risk of providing audit services is too high. We already see talented chartered accountants who are wary of entering audit services and preferring advisory services,” said Ramesh.

Senior auditors noted that there should also be some regulation of internal audits and the work of audit committees. “Quality control cannot be introduced just at the end of a process, it has to be there at every stage to ensure a true and fair view of a company’s financial situation,” said an expert who did not wish to be named.