Regulators all over the world are penalising auditors with monetary fines and barring them from accepting audits for a certain period. APAS in Germany levied a fine on the auditors of Wirecard — a fintech firm. The Financial Reporting Council (FRC) in the UK penalised the auditors of SIG Plc.
Ever since its establishment, the Public Company Accounting Oversight Board (PCAOB) in the US has penalised many audit firms and auditors. Indian regulators have not been watching silently from the sidelines. The National Financial Reporting Authority (NFRA) in India penalised the auditors of Café Coffee Day and Dewan Housing Finance Ltd (DHFL).
The Securities and Exchange Board of India (SEBI) noted violations in the work done by the auditors of Brightcom Group. The APCID remanded a partner of an accounting firm to judicial custody for admitting to negligence in the audit of a popular chit fund. The charges against the auditors in each of these cases were almost similar — varying degrees of negligence while performing their duty.
Being an auditor of a company could top the list of the riskiest professions to pursue in the present times. The latest sensation — ChatGPT — will also not help. It will answer a lot of questions on auditing in detail but will not be able to sign an Audit report.
Negligent Auditors
The negligence that the regulators charged the auditors with were not minor offences. Audits were accepted disregarding independence requirements, audit files were found to have been tampered with after the regulators sought audit evidence, professional scepticism was not maintained to highlight certain fraudulent transactions and in certain cases, elementary audit procedures were not carried out.
For instance, in the UK, the FRC concluded that the auditors of SIG Plc failed to obtain and document audit evidence over the testing of rebate terms and the testing of rebate debtor balances.
They also failed to exercise sufficient professional scepticism by not investigating signs that the balances of rebate debtors may have been overstated. In the case of the Brightcom Group, SEBI observed that “the financial statements of BGL during the investigation period were not prepared and presented in accordance with various prescribed accounting standards”.
However, it was observed that the auditors for various years did not issue a qualified/adverse/disclaimer of opinion on the financial statements of BGL in accordance with SA 700. Further, as per the Auditor’s Report for the FYs 2018-19 and 2019-20, the company was having branch operations in the US.
In terms of Section 143 (3)(b), (c) and (d) of the Companies Act, 2013, the Auditor’s Report had to provide certain statements/disclosures in respect of books of account and audit of such branch which were not provided.
These developments are going to have repercussions on the profession. The number of students opting for an accounting course is already on the decline — a trend that is expected to continue resulting in a shortage of auditors. On their part, some auditors would refuse risky audits in case the management do not agree with the views of the auditor on certain transactions — leading to a demand/supply mismatch. Going forward, auditors would be more careful in their documentation and reporting.
However, it is a fact that auditors would be completely independent only when they are not dependent on the client for their fees. The ICAI/SEBI/NFRA should get together and think of establishing some sort of an escrow mechanism for the payment of audit fees at least for listed entities. The developments over the last few years will certainly force auditors and audit firms to embrace professional indemnity insurance policies without any hesitation.
The writer is a chartered accountant