It would be unfair to paint the entire audit fraternity with the same brush and thus audit quality as a whole is not concerning, said Vishal Divadkar, Head of Audit and Partner at audit affiliate of BDO, MSKA & Associates. The veteran auditor said that auditors’ topmost challenge continues to manage the expectation gap i.e., the gap between what the regulations demand and what various stakeholders expect of an auditor.
On the subject of auditor appointment, Divadkar said there is no need to tinker with the regulation, emphasising there is nothing wrong with the process per se, and that it is robust enough by itself.
The industry observer also asserted that the current list of non-audit services prohibited under the Companies Act regulation is enough to address the threats to auditor independence; the Companies Act, 2013 prohibits certain non-audit services to statutory auditors like preparation of financial statements, valuation, or management consulting etc to prevent conflict of interest. A conflict of interest simply arises when an auditor takes up the more lucrative advisory work from the audit client, thus compromising his/her independence. Edited excerpts from the interaction:
Q: How do you see the role of statutory auditors in the light of recent frauds taking place at shipping company ABG Shipyard as well as at the NSE? Are these cases exceptions or is audit quality a concern?
Vishal Divadkar: I would not say that overall audit quality is concerning, there may be a few cases, but I would not like to comment on the specific cases.
The line between an audit failure and a corporate failure is so blurred, that at times every corporate failure or fraud is perceived to be an audit failure and an instance of a deficient audit. Audit quality is highlighted only when things go wrong.
The key point to focus is how audit quality is measured. In my view, while auditors have a moral responsibility to bridge the knowledge and evolution gaps, they are responsible for the ‘performance gap’ and should be held accountable for any failure.
Bridging the knowledge and evolution gaps would require a concerted effort from the wider governance ecosystem. But every case of audit failure should be evaluated for this performance gap.
To that end there is always room for the audit profession to up their game and exercise heightened professional scepticism to the ever-changing business complexities and suituations. The audit profession needs to ensure quality is consistently high.
Q: What are the top challenges facing auditors today?
Vishal Divadkar: The topmost challenge is managing the expectatation gap – i.e., the gap between what the regulations demand and what various stakeholders expect of an auditor. Another challenge would be to keep pace with the revolutionary shift in the business landscape.
Q: Would you say the management or the preparer of financial statements is perhaps the weakest link in the overall broader corporate governance framework?
Vishal Divadkar: The primary responsibility over financial statements, laying down processes and systems, setting up an appropriate governance framework rests with the management in conjunction with the investors and promoters.
Each of the stakeholders has a role to play as far as financial reporting is concerned. Auditors will continue to independently express their opinions on these aspects as part of their duty of care towards shareholders and as required by auditing standards while issuing an opinion on the financial statements.
Q: Do company auditors need to be appointed by the SEBI itself or an independent body like Comptroller Auditor General to improve independence of auditor General to improve independence of auditors?
Vishal Divadkar: There is a well-defined legal process for auditor appointments where eventually all appointments are approved and ratified by shareholders. There is nothing wrong with the process per se, it is robust enough by itself. What is needed is for each of the parties, including promoters, management, and audit committees to have played their respective roles with more conviction, ethics, and integrity.
The present mandatory firm rotation rules are aimed at bringing about independence and objectivity to the process and doing away with the threat of familiarity.
Q: What are your views on a complete ban on non-audit services for statutory auditors for their audit clients so as to remove conflict of interest?
Vishal Divadkar: The current Companies Act and Independence rules are quite robust and do consider and address the threats to auditor independence with respect to providing non audit services.
Q: What are your views on the joint audit rule as a measure to improve audit quality?
Vishal Divadkar: On the face of it, the involvement of two independent audit firms rather than one should improve audit quality if implemented effectively. For joint audits in particular, the audit process should benefit from different perspectives, and greater levels of review and other quality control processes should increase confidence in the group audit opinion.
Two auditors should also be in a stronger position to challenge the Management than one firm alone. Both audit firms need to reach their own audit opinion on the group accounts, but they normally issue a single group audit opinion. They do not assume that that the other firm’s work is satisfactory; each firm reviews the work of the other.
As is evident from the introduction of the joint audit framework in the public sector and regulated businesses like Insurance and more recently private sector Banks/NBFCs, the current thinking is that the move is aimed at improving audit quality; however we would need to wait and watch how this will unfold as measuring the effect of joint audits on audit quality has not been formally researched or backed with objective evidence.