THE AUDITOR IS NOT A BLOOD HOUND
The House of Lords in a famous historical decision announced "Auditor is a watch-dog and is not a blood hound". It is well established that the role of an auditor is to provide an assurance against the fraud, error and misstatement. No auditor can provide insurance or a guarantee against fraud or error.
In United States, 135 banks have been wound up in last 12 months. Similarly Lehman Brothers, one of the largest investment bankers in the world was liquidated suddenly within a period of 3 months
from a very strong position. Similar corporate failures took place like Enron and World Com in US but later on after a long trial in US, the US Justice Department decided to drop Arthur Andersen's prosecution.
Whenever there is a corporate fraud or reported major financial indiscipline, it is natural that the society and the other stake holders will ask "what the auditor was doing". In case when after unbiased investigations, it is revealed that the auditor has been grossly negligent, it may be appropriate to professionally punish the auditor and also to levy financial penalty through disciplinary process. It would be dangerous to assume that the auditor was grossly negligent in all cases where the fraud or material error is detected. It is important to understand the ground realities of the audit process including the manner in which the audit is conducted or can be conducted and what is the mandate given to an auditor. The auditor can at best act as a watch-dog against fraud and error, which would really mean that the auditors presence, due diligence and audit process provide a deterrent against
fraud and error. The audit also assures the overall financial discipline and a check on the working of
internal controls in an organization and their efficacy of working. The society and the stake holders on the other hand expect that once an auditor is appointed and the Audit is conducted, no fraud or error should occur and that the auditor should exercise necessary due diligence and detailed audit procedure to ensure a complete safeguard against fraud and error.
This is a big expectation gap from what an audit is and what is perceived as 'the auditor should be'.
The proposed provisions in Companies Bill 2009 proposing imposition of imprisonment up to one year, even for technical non-compliance, is completely unacceptable in the current perspective unless the position of auditors are transformed from a watch-dog to blood hound. And that will certainly change the face of auditor, alter radically the nature and the process of audit in addition to heavy time or cost implications to the businesses. Needless to say, in that situation rights and powers of the auditors shall surely be required not only of a police investigative officer. Are the businesses ready for it, is government appreciative of it or for that matter is that situation required at all? These are the question society and all concerned need to answer and have a concurrence upon.
The society, the government and the judiciary cannot and should not punish an auditor by imprisonment before impartial trial unless prime facie , the auditor is knowingly and willingly party to a fraud or the nature of fraud and / or mis-statement in the financial statement is such that a criminal conspiracy, criminal breach of trust or criminal abatement can be established. Unless a criminal involvement of an auditor is established beyond doubt, it may be completely inappropriate to provide for imprisonment as a penalty. In case auditors are found guilty, in some exceptional cases of gross negligence they can be punished by the Institute of Chartered Accountants by withdrawal of his Certificate of Practice for an appropriate period commensurate to the nature and gravity of the guilt besides imposing necessary financial penalty. We all need to educate the society, bureaucracy, media
and the judiciary about the role of an auditor. The recent trend of arresting the auditors and not even
granting the bail at a stage when the guilt of an auditor is not established is against the principles of natural justice. We need to provide a fair trial and in case the evidences establish the criminal guilt, the criminal prosecution, imprisonment and harsh penalty should be imposed.
In United States, 135 banks have been wound up in last 12 months. Similarly Lehman Brothers, one of the largest investment bankers in the world was liquidated suddenly within a period of 3 months
from a very strong position. Similar corporate failures took place like Enron and World Com in US but later on after a long trial in US, the US Justice Department decided to drop Arthur Andersen's prosecution.
Whenever there is a corporate fraud or reported major financial indiscipline, it is natural that the society and the other stake holders will ask "what the auditor was doing". In case when after unbiased investigations, it is revealed that the auditor has been grossly negligent, it may be appropriate to professionally punish the auditor and also to levy financial penalty through disciplinary process. It would be dangerous to assume that the auditor was grossly negligent in all cases where the fraud or material error is detected. It is important to understand the ground realities of the audit process including the manner in which the audit is conducted or can be conducted and what is the mandate given to an auditor. The auditor can at best act as a watch-dog against fraud and error, which would really mean that the auditors presence, due diligence and audit process provide a deterrent against
fraud and error. The audit also assures the overall financial discipline and a check on the working of
internal controls in an organization and their efficacy of working. The society and the stake holders on the other hand expect that once an auditor is appointed and the Audit is conducted, no fraud or error should occur and that the auditor should exercise necessary due diligence and detailed audit procedure to ensure a complete safeguard against fraud and error.
This is a big expectation gap from what an audit is and what is perceived as 'the auditor should be'.
The proposed provisions in Companies Bill 2009 proposing imposition of imprisonment up to one year, even for technical non-compliance, is completely unacceptable in the current perspective unless the position of auditors are transformed from a watch-dog to blood hound. And that will certainly change the face of auditor, alter radically the nature and the process of audit in addition to heavy time or cost implications to the businesses. Needless to say, in that situation rights and powers of the auditors shall surely be required not only of a police investigative officer. Are the businesses ready for it, is government appreciative of it or for that matter is that situation required at all? These are the question society and all concerned need to answer and have a concurrence upon.
The society, the government and the judiciary cannot and should not punish an auditor by imprisonment before impartial trial unless prime facie , the auditor is knowingly and willingly party to a fraud or the nature of fraud and / or mis-statement in the financial statement is such that a criminal conspiracy, criminal breach of trust or criminal abatement can be established. Unless a criminal involvement of an auditor is established beyond doubt, it may be completely inappropriate to provide for imprisonment as a penalty. In case auditors are found guilty, in some exceptional cases of gross negligence they can be punished by the Institute of Chartered Accountants by withdrawal of his Certificate of Practice for an appropriate period commensurate to the nature and gravity of the guilt besides imposing necessary financial penalty. We all need to educate the society, bureaucracy, media
and the judiciary about the role of an auditor. The recent trend of arresting the auditors and not even
granting the bail at a stage when the guilt of an auditor is not established is against the principles of natural justice. We need to provide a fair trial and in case the evidences establish the criminal guilt, the criminal prosecution, imprisonment and harsh penalty should be imposed.
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