Satyam fallout hits Indian auditors

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‘Audits are going to become far more stringent [in India] and people will run
away from the profession’, warns Amarjit Chopra, chairman of the Accounting
Standards’ Board at the Institute of Chartered Accountants of India.

His prediction comes in the wake of the scandal surrounding the Indian IT
giant Satyam, which saw its chairman Ramalinga Raju admit a $1bn accounting
fraud had taken place at the company.

The scandal has also seen the arrest of two partners from
PricewaterhouseCoopers, Satyam’s auditors. Chopra expressed concern that the
detentions had come while some of the key officials of the beleaguered computing
company were still roaming free.

Mukesh Butani of BMR Associates ­ a consultancy firm that emerged from the
Indian ruins of Arthur Andersen ­ agrees with Chopra that the scandal has made
the life of Indian auditors more difficult: ‘It will completely redefine the way
the auditors are going to act in future’.

There could also be an impact on the cost of accounting, argues Butani, with
bills rising because the auditors will be expected to exercise a higher level of
due diligence while certifying the correctness of balance sheets or signing off
accounts. Erring auditors and companies could also face stiffer penalties, he

One of the most significant parts of the scandal is the alleged fake bank
documents reportedly furnished to the auditors. Accountants in India argue it is
normal for auditors to accept documents at face value, claiming that in the case
of Satyam there was no reason for suspicion.

But Hinesh Doshi, a chartered accountant and vice president of India’s
Investor’s Grievance Forum, says once the outcome of the investigations is
known, he expects the Indian institute to issue fresh guidelines for its
members, asking them not to simply rely upon the information given by the
clients. ‘Some [new] laws would allow accountants to directly deal with the
third parties like bankers, creditors and debtors to seek balance confirmation,’
he says.

Chopra claims that, because of the alleged use of bank accounts for up to
10,000 fake employees, he expects joint auditors to be introduced for the banks
themselves, as well as audits for bank branches.

Meanwhile, the scandal has led to renewed demands for a compulsory rotation
of auditing firms in every company, with many claiming the three-yearly rotation
of partners from the same auditing firm has been found wanting.

The Indian institute is expected to issue guidelines to make this rotation
mandatory. According to India’s Economic Times, giant local investors, the Life
Insurance Corporation of India and the General Insurance Corporation of India,
have already asked companies in which they hold significant investments to
change their statutory auditors every three years.

Chopra also hopes a long-standing demand from his organisation for joint
audits of listed companies, where one of the auditing firms would be appointed
by market watchdog, the Securities and Exchange Board of India (SEBI), will
finally be taken forward by the Indian government. Under current company law
only one statuary auditor is appointed, by the company client.

There has also been a parallel proposal from the SEBI to carry out peer
reviews of audits for all companies that make up Standard & Poor’s Nifty-50
index of firms on the Indian stock exchange.

Meanwhile, the ICAI is also hoping to gain more teeth, maybe through
legislation. ‘If there are deviations [in company’s accounts], we can seek
information from our members, but we cannot write directly to the company, as
they are not duty bound to give us any information,’ says Chopra. He hopes that
this will now change.

Butani believes more oversight is needed, however, and wants a new watchdog
in India on the lines of the Public Company Accounting Oversight Board in the
US. Currently there is only the Indian institute, which is responsible for
implementing standards and acts as a regulator for its members.

He also wants reform on the investigation of such crimes, which in this
instance has been hampered due to the involvement of multiple bodies and looks
forward to a central coordinating agency with the authority to conduct them.

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