Stay Away from Audit if you can’t meet expectation gap; It’s a serious business: ICAI President

Chartered accountants should not consider becoming auditors if they are unable to meet the expectation gap, and should instead consider alternative avenues such as GST litigation, insolvency, or valuation practise, according to Debashis Mitra, President of the Institute of Chartered Accountants of India (ICAI). “Audit is a serious business today,” said the President. His remarks come as auditors continue to face heightened scrutiny from authorities and the public in the aftermath of a surge in company and accounting failures.

Mitra further stated that despite recent clashes between the CA Institute and the independent regulator, the National Financial Reporting Authority (NFRA), the two can coexist. He also expressed his thoughts on auditor independence and audit quality.

Following are Questions & Answers from the interview:

Q: How would you rate the quality of audits over the last five years?

Debashis Mitra: Audit quality has increased, but it is still a work in progress. It isn’t perfect yet, and we must work hard to get there.

Q: What makes you think audit quality has gotten better in recent years?

Debashis Mitra: Regulators and regulation have played a role in insisting on disclosures.

Schedule 3 of the Corporations Act discusses the disclosures that companies must provide in relation to their financial accounts. Stringent reporting standards for auditors, such as the Companies Auditor’s Report Order or CARO, which became effective this year and addresses fraud reporting, are likely to boost audit quality even more.

Because of these rules, auditors are compelled to increase the quality of their audits, to delve deeply into the company’s financial statements, and to delve deeply into the company’s activities.

Q: Do you believe the formation of an independent regulator, such as the National Financial Reporting Authority (NFRA), has resulted in an improvement in audit quality?

Debashis Mitra: The NFRA is an independent agency that examines the work of auditors for large public businesses. I’d be lying if I said it had no effect on the audit’s quality. In recent years, the NFRA has issued reports on several auditors, as well as pointed out faults in the type of audit. So, I am confident that auditors of significant public firms would take heed of the NFRA‘s suggestions and improve the quality of their audits.

Q: Auditor independence has long been a source of contention. According to some, Indian enterprises are mostly led by promoters, and the nomination of auditors is heavily influenced by promoters. What are your thoughts on this? Also, do you believe the Securities and Exchange Board of India, India’s market regulator, should begin appointing auditors in the case of listed entities?

Debashis Mitra: We support the existing quo, but we are investigating to what degree this status quo has been beneficial in terms of independence. We are seriously considering whether we should seek that the SEBI appoint auditors for listed businesses.

However, according to the Businesses Act, auditors of companies must be nominated by the audit committee and then certified by the company’s shareholders. To bring SEBI into the picture, the Companies Act must first be amended.

Q: How does the Institute feel about extending non-audit curbs or outright prohibiting non-audit services for statutory auditors in order to strengthen auditor independence?

Debashis Mitra: The fundamental issue here is taxes consultancy. That is where chartered accountants, who are also auditors, provide taxation advice. Questions were raised before the Council about whether this is a threat to self-review and whether the independence of the auditors is being jeopardised as a result of the auditors giving taxation consultancy. However, the Council was of the opinion that independence is not jeopardised.

However, I believe the government is now considering prohibiting all non-audit services for public interest organisations. It appears to have already made a decision. The Institute will not oppose it. It’s fine if they limit this to publicly listed firms. Our concern is that it should not be made applicable to small audit businesses since it would deprive them of their primary source of income.

Q: How does the Institute intend to deal with its run-ins with the audit authority NFRA during your presidency? The Institute objected to the NFRA’s consultation document on audit quality and its proposal to eliminate mandatory statutory audit for smaller enterprises.

Debashis Mitra: NFRA is a reality, and we don’t want to question it. We have one simple request: if it wants to bring in a consultation document tomorrow, it should engage us, not suppress us, and solicit our feedback. The ICAI is the major stakeholder in the profession of chartered accountants.

Fighting the NFRA will provide no results for the Institute. We believe in mutual respect and coexistence. But if tomorrow no one shows reciprocal respect and begins to denigrate ICAI, I will be fiercely protective of my Institute. The ICAI is a chartered accountants’ organisation that has been around for 70 years.

Q: What message will you send to the CAs?

Debashis Mitra: My message would be to look for other options. Some of the good alternate options available to CAs include GST litigation practise, valuation, and insolvency, among others.

Q: Do you discourage CAs from becoming auditors?

Debashis Mitra: No, I’m advising CAs that auditing entails a plethora of responsibilities as well as the possibility of disciplinary action. So, the message I’m attempting to convey is that auditing is a serious business that should be avoided if you can’t fulfil the expectation gap. If you fail to satisfy the expectation gap, you will not only get into difficulty, but you will also bring the Institute down with you.

Source : Economic Times