Sunil Jain: Why have statutory auditors?

Most believe that statutory auditors are vital in helping catch corporate fraud — after all, they examine the books of accounts and are in the best position to figure out just what’s happening. According to the KPMG India Fraud Survey Report, 2008, around 80 per cent of those surveyed said that frauds were a problem in their company, and 60 per cent said some fraud had taken place in their organisation in the last two years. When asked what the sources of the fraud were, 30 per cent said the problem lay with service providers/suppliers, around 13 per cent said customers tended the cheat, another 14 per cent said the fraud lay in the interaction with government/regulatory agencies — a whopping 42 per cent said it was senior management and the company’s board (think Satyam!) which was most likely to commit fraud.

Which is where the auditor comes in, right? Yes, and no. The external auditor, like Price Waterhouse in the case of Satyam, is supposed to be independent and therefore has a better chance of catching frauds. Yet, the KPMG Report points out, just four per cent of all frauds have been detected by external auditors — the largest proportion, 36 per cent, have been detected by internal auditors. In which case, why not just abolish the concept of the statutory external audit which, by its very nature, doesn’t involve detailed scrutiny of accounts — but gives everyone the feeling that the accounts have been thoroughly checked? Instead, on a random basis, it is better to do ‘forensic audits’ (detailed audits of the type internal auditors do, except these are done by external auditors) — they cost a lot more, but the chances of them finding something are far greater.