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Total Number of Subscribers: 467 |
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Date:23rd December 2008 |
Compiled by Mr. M. Sathya Kumar |
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Auditing Beyond
Compliance Background : It is a matter of general perception that the role of the
auditor is only to do whatever in order to issue an opinion of ‘true and fair’ on the financial statements of
the company under audit. Statutory audit cannot therefore be perceived to do
anything beyond audit of the relevant books of account, obtaining
explanations and representations from management and other relevant
stakeholders such as banks, suppliers and customers. The role of the auditor together with the duties and
responsibilities are contained in several provisions of the Companies Act. The
said Act and the ICAI’s Code of Ethics are very specific
in terms of the roles and responsibilities of the auditor and the ‘bounds’ within which he should operate. The Companies Act of 1956 and
the Code of Ethics of the ICAI also deal at length with the issues relating
to ‘independence’ and under which, there can be various
penalties for non-compliance. In addition, the general understanding of the role of audit on
the part of auditors is that it is a compliance function where the auditor is
appointed to audit the books of accounts for a very specific purpose and that
is to express an opinion of ‘true and fair’. More importantly,
the perception is, had it not been for the requirement under the Companies
Act, it is possible that the client would dispense with this service. The aforesaid factors have, in one manner or the other, had
their impact on the auditor who believes that his role is that of a
compliance officer of the company that he audits. Companies also share the general perception that audit is
primarily a ‘compliance’ function and
therefore, the auditor should restrict his role to that of a compliance officer. This
thinking sometimes also arises on account of the belief that auditors do not ‘add value’ beyond audit of the books of accounts; companies
perceive that audit as a function exists to meet requirements prescribed
under the Companies Act with regard to proper maintenance of books of
account. A number of accounting firms also believe that audit is purely a
compliance function and have therefore set limitations on every aspect of
their work. As a result, clients perceive very little ‘value add’ in terms of the services rendered and whatever doubts that
existed in their minds about the role of audit gets further confirmed. Companies
also use this argument whilst fixing or negotiating auditor’s fees, little realising the services the auditor renders. The purpose of the article is to highlight the fact that ‘looking beyond compliance’ is very much within the overall role
of
compliance, except that we need to understand the fact that it is important
to shed the traditional thinking that the role of the auditor begins and ends
with pointing out errors in accounting, non-compliance with law and getting
them rectified or reported Widening the horizon : What does ‘Auditing Beyond Compliance’ mean ! The perception of audit as a compliance function has to start
with the auditors recognising the fact that they cannot be putting ‘fetters’ on themselves by playing merely the role as
‘compliance officers’. The important thing to
understand at this stage is, what does ‘auditing
beyond compliance’ actually mean. Most professionals imagine this entails adding
value in terms of identifying areas for cost reduction and control, process
improvements through the identification of processes that do not add value,
etc. Auditing Beyond Compliance need not always involve going beyond the
normal call of duty as an auditor as one can see in the following
paragraphs Adopting a pro-active approach to audit : Most auditors fail to recognise the importance and value in
adopting a pro-active approach to auditing. Transparency and proactivity can
build trust and the auditor must recognise that this policy works in almost
all cases. For example, many auditors involve their client personnel in
important decision making such as planning of the audit. Client staff is
invited for sessions where the audit approach is explained at a broad level;
what are auditor’s expectations from the client in terms of
information, the timing of information, etc., providing general guidance to
client staff in the preparation of certain audit schedules without getting
into ‘conflict of interest’ situations,
etc. are
some of the simple ways of going beyond compliance. Client staff becomes very
comfortable dealing with auditors who work alongside them and help them
understand and address some of the complex requirements. Helping client staff
in various procedures involved in a simple stock-take can add value. For
example, auditors can provide critical inputs in helping client staff keep
the production area clean and demarcated to facilitate stock-count.
Similarly, many auditors transfer knowledge on important areas such as
revenue recognition to enable client staff to record revenue correctly.
Cut-off procedures invariably pose a challenge and the auditor can provide
inputs to client staff achieve effectiveness of cut-off procedures. The auditor
can add significant value in the process of assisting clients without
compromising on his independence as auditor. Partnering clients : In addition to assisting clients during course of audit, many
auditors partner clients in many other ways: For example, clients face
difficulties in understanding the implications of new accounting standards
and therefore, get delighted when auditors play a pro-active and partnering
role. Thus, when AS-30 was introduced, many clients were not conversant with
the complex requirements. Auditors provided the much-needed knowledge on how
to comply with the requirements relating to ‘hedge
accounting’ including documentation requirements. Clients were
advised what needed to be done right from the beginning, so that they
understood the key aspect of ‘hedge accounting’. Many auditors recognise the importance of keeping clients
informed on all major developments in terms of new laws and accounting
requirements, etc. that impact companies in general and a client in
particular. As a result of this communication, auditors develop a
relationship that results in a ‘no surprises’
audit. This is because, most contentious issues are discussed and resolved prior to
year end, particularly with the top management to ensure that nothing is
taken to the audit report as a ‘matter of
qualification’. All issues that have a reporting implication are discussed well in
advance and remedial action taken to ensure closure of issues. It is possible
that even after all this, the auditor may decide to go ahead with a
qualification in his report. But, this will be seen as clearly the last
alternative, as opposed to a feeling that ‘not all
options were explored’. In the past few years, many medium-sized companies have been
entering into M & A transactions, collaboration agreements and royalty
agreements, etc. These are out of the ordinary transactions and involve
complex accounting and other issues where the auditor can play an important
role. Many auditors provide clients that are in the process of entering into
such transactions, ‘on line’ accounting and other
advice,
so that accounting implications that have a significant bearing on the
transaction can be taken into account before finalising the transaction.
Also, it would provide the client with comfort that these transactions will
not be subject to accounting review at the year end, since they are already ‘agreed upon’ with the auditors. Similarly, audit of transactions on a quarterly basis, asking
for confirmation of balances during the year or a date close to year end date
(without diluting the effectiveness of the audit procedure), etc. are some of
the ways in which significant value can be added. Adhering to client deadlines, targets, etc. : Many auditors believe in the importance of adhering to client deadlines
in terms of finalising the accounts. Invariably, board meetings for adoption
of accounts are fixed well in advance and cannot be postponed except at great
embarrassment and heartburning. In such cases, auditors discuss the entire
schedule to finalisation well in advance with the client to ensure that a
timeline is drawn up that is adhered to by both parties. In case the timeline
is very aggressive, the matter is taken up with management immediately and
conveyed. Even in such cases, clients are asked to draw up a schedule to
demonstrate that the timelines are workable and realistic. Once agreed upon,
there is no question of ‘backing out’ at the last moment. Fixed timeline audits invariably lead to many arguments and
heartburning because the schedule is not adhered to and the ‘blame game’ starts with the auditor invariably being held
responsible for the delay. Auditors therefore maintain a very pro-active and
open communication with the client where, any potential problems are
escalated and thrashed out in advance only, to avoid the blame game. Auditors
foresee such issues well in advance and discuss the issue with the client in
an open and free manner to save on the ‘last minute’ surprises. Conflict resolution : Auditors who do not adopt the ‘Compliance
Auditor’
mindset adopt a very positive attitude towards conflict resolution. By adopting
an attitude where ‘solutions need to be found if they
at all exist’ as opposed to ‘how can solutions be found in such cases’, auditors go beyond
the compliance approach to partner clients on a very pro-active basis and in
the process add significant value. The auditor perceives his role not merely
as a ‘compliance officer’ whose job it is to find mistakes, errors,
deviations from accounting practices and non-compliance with law, but looks
at such issues with an open mind to ascertain whether solutions exist, before
reporting them to the members. Most auditors believe that finding solutions to problems is not
their ‘business’, whereas clients feel delighted when auditors
perceive their role as ‘solution finders’ and not merely,
‘fault finders’. As a result, clients see great value even in cases where the auditor is
constrained to report such deviations, etc. in his audit report. Mentoring and knowledge sharing : An auditor gathers significant amount of business knowledge
during the course of audit. In many cases, such knowledge does not get shared
and is a waste. However, many auditors share the knowledge they have acquired
during course of audit by way of communication to audit committees and
boards. In addition to sharing knowledge gathered by him, management letters
containing areas of cost reduction, better compliance, etc. are highlighted
and discussed with the client together with a clear plan of action to avoid
recurrence. Clients also feel delighted with auditors who identify areas
which help remedy faults from recurring. In the process, the auditor adds
value that goes beyond the ‘compliance function’. Conclusion: Adopting the right attitude towards the audit function and
working beyond self-imposed constraints are options that are clearly
available to the auditor without compromising on any of his duties and
responsibilities as the auditor. Auditors need to recognise that playing the
role of the ‘compliance officer’ does not mean
putting a fetter on one’s ability and attitude towards the
role. In fact, the auditor invariable gets an opportunity to play a pro-active,
positive role in terms of partnering the client. Assisting the client improve
upon his stakes is the best way to transform. As a matter of fact, the only
way to transform is to play an active role in helping and mentoring clients
change for the better. If audit is to be given the right place and value, auditors, companies
and other institutions need to work towards getting audit its rightful place
and that is, it is one of the most valuable and insightful functions that is
awarded to an ‘outsider’, who is provided with an opportunity
to look at various transactions entered into by the company in a systematic
and insightful manner, evaluate at times business risks in addition to
various aspects of internal control including assessing the ‘tone at the top’ that is set by the management in the course of business. The profession of accountancy and audit is on the threshold of
significant changes in the wake of the business failures that we are
witnessing by the day across the world and if it has to serve its role
effectively, it will need to get rid of the shackles it has put itself under
and work towards expressing itself constructively, in a pro-active manner. An
auditor should work as a partner to the business by communicating to the
audit committee, the board and the management in a timely manner on all
important issues of which he has gained knowledge during course of audit. Lastly, the ICAI has embarked on a massive project aimed at
making the entire accounting framework IFRS compliant, by 2011. Auditors have
been provided with the most valuable opportunity to assist clients in this
process in several ways without, at the same time, getting conflicted out.
Auditors of companies have already started advising companies what the
implications are and what the impact would be in the year of transition.
Companies are therefore delighted that auditors have become very pro-active
and this augurs well for the profession. ‘Auditing Beyond Compliance’
therefore is largely, a mindset issue and auditors really need to embrace change to
become more relevant to their clients by adopting a more pro-active,
constructive and ‘partnering’ approach towards
clients. The challenge before the auditor is to become the client’s trusted advisor and partner, without losing out on ‘independence’. Article
by Mr. Ramakrishnan, a renowed Chartered Accountant |
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