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Is audit losing its relevance?

Asish K Bhattacharyya 

A recent move by the to reduce branch audits of banks has received significant attention of the media. As per media reports, banks have written to the suggesting reduction in branch audit to reduce non-value added costs.It is argued that with concepts like and centralised record keeping, the relevance of the audit of branches of (PSBs) has significantly declined. will definitely decide the issue considering the pros and cons of reducing audit of branches of PSU banks. However, the move signals that companies have started evaluating audit in terms of the value it creates for them. They do not want to take it as an ‘unavoidable burden’ any longer. It also signifies that with rapid technological innovations, the scope and techniques of audit are changing fast. This is not unique to the auditing profession. Every profession evolves on a continuous basis to keep itself relevant to the society.

The recent move has ignited the debate on whether the attestation function being carried by chartered accountants has lost relevance. Is it providing any value to stakeholders? Generally the value of any service that is priced by the market is measured in terms of the price that it fetches in the market place. If we use this parameter, the attestation function carried out by CAs, better known as statutory audit, is valued lower than that of other services (e.g., consultancy services) being provided by the members of the accounting profession and others. Companies pay much higher fees for consultancy services than what they pay for the audit. But before we come to this conclusion, we need to examine certain governance issues.

The statutory auditor is primarily accountable to shareholders, and more generally to the public. Although, as per law, shareholders appoint the statutory auditor, in reality, the management appoints the auditor. Therefore, the fee that is paid for the audit reflects the perceived value to the management and not to the shareholders. The audit aims to provide reasonable assurance that the financial statements provide a true and fair view of the financial position and the financial performance. The assertion by the auditor that the financial statements give true and fair views adds credibility to those statements. This strengthens the speculative monitoring of management by capital market agents like analysts and credit rating agencies. Theoretically, the increased confidence of investors in disclosures by the company reduces the cost of capital. Therefore, audit definitely adds value to the company, but does not improve the quality of managerial decisions. Consequently, controlling shareholder group or professional managers, who are unscrupulous, despise the audit and conscientious managers often fail to see the value in audit.

Regulators see value in audit. Therefore, some of the regulations governing audit requires the auditor to play the role of a whistle blower. For example, the stipulates that if an auditor of a company has reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the central government within such time and in such manner as may be prescribed. Regulators value independence of auditors.

This is reflected in the new initiatives in the Companies Bill to protect the independence of auditors and to impose harsh penalty on negligent auditors. Regulators have not left the appointment of the auditor at the sole discretion of the executive management.

The of the board has the responsibility to recommend appointment, remuneration and terms of appointment of auditors of the company and to review and monitor the auditor’s independence and performance, and effectiveness of the audit process. Unfortunately, most audit committees do not spend adequate time in carrying out the responsibilities related to audit. As a result, they go with the recommendation of the executive management and consequently audit fee reflects the value perceived by it. If the audit committee, which is expected to protect non-controlling shareholders’ interest, performs effectively, the value perception is likely to change.

The current debate will tempt the auditing profession to re-orient its services to enhance value from audit as perceived by the executive management. This might lead to dilution of the core attestation function.

Moreover, if the reward does not match with the enhanced accountability and social expectations, cream of the accounting profession will not get attracted to provide auditing service. The loss will be to the corporate sector, investors and the economy as a whole.

Asish K Bhattacharyya Email: 
Affiliation: Director, International Management Institute – Kolkata

First Published: Mon, February 06 2012. 00:24 IST