Audit firms may face action for wrong-doing

The ministry of company affairs (MCA) intends to insert a clause in the Companies Act that will make audit firms also liable to prosecution as against the existing provisions that limits penal action only to chartered accountants.

The proposal, being pushed by government agencies, has found favour with MCA and the amendments could be made when the recently-introduced Companies Bill comes up for discussion in Parliament. “This is the fallout of the Satyam case where the accounting firm got away, while the auditors who represented the firm face punishment. Therefore, there should be appropriate action for the firm as a whole so that it is held liable for such fraudulent practices,” said sources privy to the discussions.

They explained that the logic behind the proposition was that auditors work on behalf of a firm with clearly laid down guidelines. They also share the revenues from the audit and are well aware of the developments in audit assignments. Therefore, an auditor does not work independent of his or her firm.

In addition, the ministry is also contemplating tighter norms for peer review of audits. It proposes to ask all regulators – the Securities and Exchange Board of India, Reserve Bank of India and Insurance Regulatory Development Authority – to make peer review mandatory for banks, companies and insurance companies who deal with public money.

So far, Sebi has initiated peer review of audits of 30 companies that make up the Bombay Stock Exchange Sensitivity Index or Sensex and the 50 companies of Nifty 50, in addition to a few other companies. But progress has been slow. Officials said the auditors should be trained fist to check something that another auditor of 10 or 15 years of experience has done. Once the training is over, peer review will be made compulsory.

Further peer review will not only be inspection work but auditors involved in this review will be held accountable for any discrepancy. Peer review of audit involves getting the audit of a company vetted by another auditor for a second opinion.

According to sources, the ministry has flagged many other issues to the Institute of Chartered Accountants of India for examination based on the feedback received from the industry. These include working out a compensation schedule for chartered accountants similar to article clerks, appointment of qualified chartered accountants for audit work and not article clerks or industrial trainees and directing the firms and chartered accounts to be more accountable for quarterly audit of companies than just filing a disclaimer after the audit.