'Auditors Are Not Machines'

My disciplinary team and investigative mechanism willshow whether what they have stated to our show-cause notice is right or wrongand whether due diligence has been carried out or not.

On the possibility that the auditors were kept inthe dark about the misrepresentation of accounts?

It all depends on the facts and circumstances of thecase. As the information is trickling down to us, we need to examine what hasreally happened and how it all happened. That will be taken care of by thedisciplinary committee. Then, there is a also a six-member committee that willlook at bigger issues such as what needs  to be done to prevent suchfalsification of accounts in the future. 

Whether the company could have provided differentbooks /balance sheets

See, that is the question that has been agitating usall for so many days now. When a fraud of such magnitude is perpetrated and oversuch a long period of time, with all the norms being followed, it raisesquestions about the very efficacy of the norms. But I believe that the norms arein place. So the problem is somewhere else.

Is it a systemic failure or is it a one-off thing?

It is definitely a one-off thing. I have always beensaying that it is an aberration, an accident and not a systemic failure. Becauseof his greed, Ramalinga Raju of Satyam has taken everybody for a ride. When Isay taken for a ride, I mean that there is a failure at all levels. Be it amongthe lower level accounting staff of his companies, bankers, internal auditors,statutory auditors, audit committees, independent directors etc. They have allfailed.

So do you believe that there was a connivance ormerely an omission on the part of the auditors?

It will be premature to say anything at this point oftime.  Only after the examination of documents and evidences will it becomeclear whether the auditors have connived or not.

Has any rule been flouted?

From January 7, I have been saying that auditors arenot machines. Auditors are after all human beings. They have to see so manythings and use their professional skill and judgment and there are so manysignals that arise in the left and right of the account books that can lead theauditor to various conclusions and suspicions. But it is strange that none ofthe signals were picked up.

So what you are saying is that they did not catchthe trends? 

I will not say that. As president of ICAI, it will bedifficult for me to pass a judgment without going through the facts. So we aretrying to look at the facts. But looking to the quantum of the fraud and thenumber of years it has been perpetrated in, definitely it is a serious issue forall of us. And we are all concerned about it.

So are you saying that auditors are not at fault?

I am not saying that the auditors were not at fault.Had I been of the view that the auditors are not at fault, I would never haveissued a show-cause notice to the firm. I have also asked them to submit allbalance sheets, financial statements and related documents of Satyam Computersaudited by them.  Prima facie I am looking into the facts of the casebecause it is an extremely serious matter. I am calling for an explanation fromthe auditors. They need to come and explain to me what they have done and how havethey done it. The disciplinary committee will examine all the facts and based onthe findings they will come out with their real facts of the case.

Is it just a case of falsification of accounts or isthere more to it?

I can’t say anything now. Only the investigation willreveal the extent of the fraud.

In case you find some gross negligence of duty onthe part of the auditors what actions can you take?

I am armed with an important power. I providelivelihood to the members through the certificate of practice. I can withdrawthe certificate of practice, withdraw his/her membership. And this rigorouspunishment can be extended up to lifetime. In other words, we can debar a memberfor life from practicing. Before commencing auditwork, all audit firms in the country have to register themselves with the ICAI.This applies to even those audit firms associated with the big four accountingfirms. The institute has the power to take action against any audit firm thatdoes not comply with auditing standards.

But what action can you take against the firmbecause they can withdraw a few members from here and there?

Recently, the Council took a decision that wherever apartner of a firm is found guilty, we will put the name of the firm in ourregister. And any agency that approaches us-- RBI, CAG, SEBI etc -- forappointment of auditors, we will tell them about the fact that the partner ofthe firm has been found guilty. We are also requesting to SEBI to ensure that nolisted company appoints auditors from firms against which disciplinaryproceedings have taken place. Thirdly, we are putting the name of the firm inthe public domain. Therefore, before appointing any auditor/audit firm companiescan check on our website, firms which have been booked for disciplinary actions.

But you cannot force a company not to appointcertain auditor for their firms?

I can only do what is within my powers. But with theactive support of RBI, SEBI and C&AG we can do a lot because we will becovering most of the listed companies, public sector organizations where thereis active shareholder interest.

Do you see a failure of the audit committee in thecase of Satyam?

See, the audit committee is a part of the management,which should have looked into the accounts. But in the case of Satyam, the auditcommittee seems to be sleeping. It seems to have no clue as to what happenedespecially about the huge cash and bank balances of the company.

How does the passage of the Limited Liability Billhelp chartered accountant firms?

The Limited Liability Bill has already been passed byParliament and is awaiting President’s assent. It will help in increasing thelevel of the firms because now a single firm can have more than 20 partners,which was not allowed earlier.

Given the Satyam fiasco, do you feel the need forsome kind of a Sarbane Oxley kind of a legislation? 

The answer is simple. Satyam was governed by theSarbane Oxley Act because it was listed in the New York Stock Exchange, So thisquestion becomes irrelevant. So if Satyam could happen despite Sarbane Oxley,what is the guarantee that such a fraud will not happen if we have such a law inIndia? Again, we already have Clause 49, which is similar to Sarbane Oaxley Act.

Can a class action suit be brought against a firm?

It can be brought both against a partner in a firm andalso against the firm itself, because the firm is an entity made up of partners.But it has nothing to do with Indian laws.

What else are you doing against errant firms? 

ICAI has also decided to put up names of all thosechartered accountancy firms whose members have been found guilty of wrong-doingin the past five years. This would be a deterrent and would dissuade corporatehouses from hiring such firms.

Can you look into the books of other firms if theneed arises?

Yes, we can do so under the Financial Reporting ReviewBoard. We can actually call for the account book of companies for audit. So weare talking to the government as to how we can strengthen this procedure. 

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