The Satyam verdict from a special CBI court has reopened the debate on the role of the statutory auditor or public accountant. The Companies Act, 2013, written against the backdrop of Satyam, provides for mandatory audit rotation in the case of listed companies and certain other classes of companies, limits the number of audits an individual auditor can carry out, prohibits business relationships between auditor and auditee and restricts the non-audit services an auditor can provide an audit client. Importantly, it also provides for class action against an audit firm, whereas hitherto, liability could be fastened only on the individual auditor and not on the firm in which he is a partner or employee.
Well intentioned as these measures are, they are not enough. For example, alongside the Satyam verdict comes news of a report by the Serious Fraud Investigation Office (SFIO), suggesting that the books of a third of the BSE 500 companies are dodgy (‘A third of top 500 firms’ books dodgy’, IE, April 10). Audit quality cannot be enhanced to the fullest nor audit independence secured unless we address the issues of low audit fee, auditor independence, the education of the public accountant and his standing in society.
Audit fees in India are low relative to costs, investments and risks. It takes anywhere between three to five years to produce a competent accountant and years of practice for a public accountant to become an expert auditor. In addition to mastering the technicalities of accounting, auditing, the law and allied subjects, the public accountant has to keep abreast of constantly changing and evolving business models, technology and regulations. This entails investments in infrastructure and education. As businesses have become more complex and managements pressured to produce results, expectations from auditors and the risks they are exposed to have also risen. Yet, if audit fees in India are niggardly, auditors themselves are partly to blame. Undifferentiated, they compete largely on fee and relationships.
Undercutting is rampant and fees in many cases are inadequate to cover costs, let alone provide a reasonable return. Therefore, auditors are unwilling or unable to invest in themselves and their practice to upgrade audit quality. That an audit is an imposition compounds matters. Left to themselves, companies will likely not want an audit. They are forced to submit to it by dint of law. Thus, they do not see the need to pay “high” or even reasonable audit fees.
Low fees inhibit the profession’s ability to attract the talent it needs to take on its onerous and complex requirements. If the risk-reward relationship is adverse, an accountant who works hard to train and pass some of the toughest examinations will have no incentive to pursue a career as a public accountant, but will seek greener pastures in industry, as is happening already. As it is, perhaps accounting itself is not attracting top talent, as bright young people seek the less demanding and more rewarding avenues of a management degree or an engineering qualification. The public accounting profession cannot be put on a sustainable path of high quality unless it makes itself attractive to a steady stream of the best and brightest. For this, the vicious cycle of low fee-low investment-poor talent-poor quality must be broken.
Regulators the world over are increasingly concerned about audit independence. Rules governing the kind of non-audit services an auditor can provide an audit client and the terms under which they can be provided have become more stringent. The Companies Act also contains salutary provisions in this regard.
While all of this is to the good, audit independence cannot be assured as long as the auditor is beholden to his client for his fee. After all, whoever pays the piper calls the tune. One solution to this “agency” problem is — at least with respect to listed companies — for the auditor to be paid by Sebi from the proceeds of a levy on the companies. The Institute of Chartered Accountants of India (ICAI), Sebi and industry associations must come together to discuss and arrive at an effective solution so as to ensure real and lasting audit independence.
Alongside technical equipment, the public accountant must acquire critical thinking and reasoning skills. These skills will help him deal with a mass of complex facts, think logically and carefully, separate the essential from the inessential, draw the right inferences and conclusions, and make his enquiries sharper and more focused. The ICAI must consider including a course in critical thinking as part of its foundation or intermediate programme.
The education of the public accountant must also include a renewed emphasis on the ethical dimension of the profession. In general, the ethical sense of our professionals, be they lawyers, accountants, doctors or engineers, is not highly developed. Each of these professions has a strong ethical code that we see honoured more in the breach. Accountants tend to avoid the impermissible rather than the unethical.
Instead, they must practise what Lord Moulton called “obedience to the unenforceable”. The ICAI must carry out annual perception surveys to gauge how the general public views the accountant and take steps to correct or improve it if necessary.
The public accountant serves an important public purpose, namely assisting in the efficient functioning of our capital markets by assuring investors of the truth and fairness of the financial statements of the investee companies. While it is important that he is paid well and his independence assured, it is equally important for him to understand what it means to serve the commonweal. What was once a profession and vocation is now an industry and a business. It is time for public accounting to reclaim its pre-eminence as a profession and as a calling, and thereby regain public trust.
The writer, a chartered accountant, was executive director at a Big Four firm in India