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ILFS; auditors
Business Tit-Bits

AUDIT, INDIA’S WEAK LINK

In an interesting and candid recent speech on corporate governance in India, Uday Kotak spoke about what ails corporate governance in India. He said that there are six layers of corporate governance in our system, including the company management, its board of directors, rating agencies, auditors and regulators. He remarked that of late, these six layers have not been doing their job and that, their performance has not been satisfactory. He lamented that auditors are one of the weakest links plaguing this corporate governance architecture in India. He said that one of the weakest links in the fiduciary chain of governance in India is accounting. Time and again we find that this situation in India is leading to significant issues for many listed companies, whether it is in the equity markets, or in the debt markets. He said that the issue in the audit profession stems from a conflict of interest where ICAI, an association of accountants also acts as its regulator.

Uday Kotak has stated the obvious and is right in his observation. Instances of auditors negligence abound and are a matter of national concern. It is the negligence/complicity of the auditors of PNB, that helped to perpetuate the gigantic Nirav Mody fraud at the Brady House branch of the PNB; it is due to the auditor negligence that the ILFS saga ballooned into a giant scam and as the recent CVC report on bank frauds/NPAs points out, the negligence of complicit auditors has played a key role in most of those investigated by the CVC. Auditors have been willing participants in these giant frauds and Uday Kotak is right in calling them one of the weakest links in the chain of corporate governance in India.

Auditors are supposed to be those watchdogs in the entire corporate structure that are required to bark when they spot corporate misconduct, but they have chosen to be mute spectators. They are not just required to certify the financial statements of a company to be true and fair, but in the process, they are also required to keep an eye on the conduct of their directors, which they have not done. It has been noted in many cases, that it has been the auditors, who whether for a financial inducement or otherwise, have compromised their integrity, overlooking the fact that the statements, that they certify are relied upon by all the corporate stakeholders, including the shareholders and the regulators too, whose trust has been belied by them.

As a result of their connivance with these corporate malpractices and misconduct, many audit firms are under investigation by regulators and by criminal investigation agencies like SFIO, CBI and EOW. It includes the multinational accounting firms, the Big Four as they are called as also many homegrown Indian audit firms. It is these very audit firms, that audited the biggest entities and also controlled the affairs of the ICAI, such as prevent any disciplinary action against them. It is this negligence of the audit professional that has led to the set up of the NFRA, thus belittling the ICAI, by taking away its powers to regulate/govern itself. Till the public trust is restored in the seal/signature of the auditor, India’s corporate governance structure will remain weak.

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