AUDIT INDEPENDENCE?

Dissent Note of Shri. D. K. Ranganekar, Member of Wanchoo committee while recommending 44AB audit ( Source 155 ITR 81)

But, one Sri D.K. Rangnekar, a member of the Committee, in his dissent (vide pp. 249 to 251) did not concur with the recommendations of the Committee on compulsory audit for these reasons:

“(2) Reform of Audit System and Profession.—We have made in the main report a number of proposals which visualise compulsory audit of accounts on the assumption that audited accounts will assist the Income-tax Department in making speedy assessments. In my view, the assumption is valid only if the scope and nature of audit are also changed. Over the years auditors have tended to certify financial statements without making a satisfactory audit assessment or even without verifying the authenticity of accounts. One wonders if black income would have proliferated the way it has if the auditing profession had discharged its functions objectively and in keeping with the high traditions of independent audit. Frequently, auditors have tended to regard audit as merely a financial obligation to certify accounts which are supposed to have been examined by them. And these are usually signed with a qualification that absolves auditors of all responsibilities for certifying financial jugglery, black-money manipulation, inventory and other irregularities.

In the manner in which the profession has developed, the role of the auditors has obviously come under a cloud. Some auditors have set themselves up as management consultants, directors, businessmen, income-tax experts (sic). They seem to do almost everything else other than searching audit. There can be no doubt that when an auditor starts to sell management and ‘other’ advice and offers various unspecified services, he immediately compromises his objectivity. Virtually one ends up with a situation where the company that has purchased the ‘services’ of the auditors in various forms follows the recommendations of its own auditor consultant leaving little else for ‘audit’. In some cases at least it would mean that the auditors concerned are being asked to pass on their own firms ‘other work’. And these instances are by no means small. A study of 501 companies showed that payments to auditors for services other than auditing were is high as 60 to 65 per cent. of the total payment made to the auditors by these companies. There are also cases where travelling and other allowances (which are usually reserved for salaried employees) are paid to auditors.

Difficulties arise because the precise role of the auditor has not been defined. The Company Law is vague on this subject, and there is very little in the existing legal framework to safeguard either the independence of the auditor or the interest of the shareholders, the public and the exchequer. The independence of the auditor is essential also for the orderly development of trade and industry. It is not enough for the auditor or his institute or council to claim independence on behalf of the profession. Independence of the auditors must be seen to exist, and must be seen in practice. It is, therefore, very essential for the Government, I think, to define the role of the auditor and free him from any obligations to his client and avoid the development of a situation which might mar his independence, objectivity and sense of responsibility. If there is any doubt about the independence, the integrity and the objectivity of the auditor or of the profession, we may well see the emergence of a movement challenging the validity of balance-sheets, audit certificates and even the credentials of auditors. Balance-sheets may no longer be accepted by shareholders and gradually by other authorities as a true index of the state of affairs of a business enterprise. There may even be a feeling that when the auditor has other interests in the company, or other incomes from the company, he may tend to conceal things in his own interest.

Even for purposes of income-tax assessment or rectitude of business and high standards of management, it is important that the public is told about the correctness of inventory valuation, of depreciation provisions and other important matters of business and profession. The multi-relationship developed by the auditors with their clients ends to dim the strictly professional role of auditors and their independence.

Against this background, I thought I might put forward the following proposals. These I consider are significant in the battle against the evil of black income. In order to ensure the evolution of an independent audit system, the economic dependence of auditors upon a certain small group of clients should also be broken.

(i) Auditors should not be allowed to render any service other than the professional service of auditing. Those auditors who prefer to render `other services’ should not be allowed to take up audit work. The idea is to develop a corps of audit firms exclusively doing audit work on the lines of specialised legal and medical services.

(ii) No auditor should be allowed any position on the board of directors of any company so long as he continues to be a professional auditor. Any auditor who prefers to be a director of a company or engage himself in tax consultancy work, system, design or any other similar work should be debarred from audit work.

(iii) Any complaint on the accuracy of audit made by 10 per cent. of the shareholders (present and voting at a general body meeting) should be compulsorily followed up by an independent investigation.

(iv) In order to reduce concentration of audit business among selected firms, a system of rotation should be followed whereby no audit firm is allowed to audit the accounts of the same client for more than three years.

(v) As general rule, a supervisory audit should be undertaken every three years by an audit firm other than the one contractually employed as auditor of a particular company. The supervisory audit should be done by an auditor nominated by the Comptroller and Auditor-General of India.

(vi) The Company Law should be amended to define the role of the auditor and to set up a Private Accounts Committee. This committee should comprise of independent economic, technical management and accountancy experts and should assist the Comptroller and Auditor-General to ensure that high standards are maintained in supervisory audit and also to act as a watch-dog of business operations involving an annual turnover of Rs. 1 crore and above.”