SATYAM FRAUD – WAY FORWARD

Startling revelation of financial fraud committed by Satyam Management defrauding more than Rs. 7000 crores by the 4th largest Information Technology Company in India has severely impacted the image of corporate India, besides raising questions of credit ability of auditors. The Institute of Chartered Accountants of India (ICAI) has taken immediate steps to issue a show-cause notice to
the auditors besides appointing a high power committee to deeply investigate into the matter in coordination with other investigating agencies. ICAI has committed itself to a time bound investigation and exemplary punishment to those who are guilty, so as to ensure credit ability of the entire profession. The Government of India, SEBI and local police should aggressively work and provide all real facts to public. The email of Satyam chairman could be motivated and cannot be relied.
The following matters are being considered to further strengthen the regulatory mechanism so as to ensure that such frauds do not happen or at least they are detected and prevented:

• Peer Review of auditors of top 100 Companies by ICAI peer review trained Chartered Accountants. The review mechanism could be a hot review. SEBI has already announced such a review through a panel to be maintained by them. ICAI peer review process need to extend to all large entity auditors.
• Joint Auditors - ICAI Council has recommended to the Government that one of the joint auditors may be appointed by the regulator in case of all large public limited listed companies.
• Appointment of independent auditors - In all those cases where large public funds are managed by a corporate on behalf of several investors / depositors, for example, in case of banks, mutual funds, venture capital / private equity fund - the government may consider that the auditors are not appointed by the management / promoter but are actually appointed by an independent regulatory mechanism. It is suggested that a 6 member committee consisting of SEBI, Ministry of Corporate Affairs (MCA) and ICAI may be constituted to take responsibility of appoint- ment and monitoring such audit.
• Promoter’s Personal Liability - The promoters of Company  should furnish a written undertaking along with all annual and quarterly disclosures that no ficitious assets or liabilities are included in the financial statements, to the best of their knowledge, information and belief failing which, to the extent of wrong disclosure, they would be made personally liable to pay the difference to the company and also to compensate various stake holders. The CEO and CFO declaration do not have any major utility in the Indian perspective. 
• ICAI may consider detailed accounting, disclosure and auditing guidelines to further strengthen the weaker areas including - 
• verification of cash and bank balances
• Un billed debtors
• mandatory provision for non-performing debtors on the lines of bank NPA
• intellectual property rights and software capitalization ,
• Projects under progress, R&D expenses - detailed disclosure of projects pending completion beyond 6 months and mandatory provisioning after one year and write-off after 2 years of all capitalization not producing a benchmark revenue.
• Mandatory provision for unsecured loans and advances extended by corporate outstanding beyond 182 days.
• Mandatory physical verification of inventory by the management and its reconciliation with a stock  record in all cases of turnover beyond Rs.50 crores. A-category items to be 100 % physically verified every 6 months / 1 year. Similar norms for other categories.
• Rotation of audit partners every 3 years is already accepted norm.