Is banning audit firms the only solution for corporate frauds?
Dipak Mondal September 10, 2019
Should audit firms be banned if they are 'caught' at the centre of a corporate fraud? Is banning the only solution? These are the questions being asked by many after the Securities Appellate Tribunal (SAT) quashed an order by the Securities and Exchange Board of India (SEBI) to ban PwC from auditing listed companies for its 'involvement' in the Satyam Computers fraud case.
The SAT yesterday reversed the SEBI order to ban 10 PwC-associated audit firms from auditing listed companies on grounds that the firms had violated the Companies Act and SEBI has no business taking action against them. It also said that it took SEBI nine years to complete the proceedings and come out with an order during which the audit firms carried out their business 'to the satisfaction of the shareholders and investors without any blemish'.
The order has come as a big relief to other big-four audit firms, all of which are under the scrutiny of the Ministry of Corporate Affairs and National Companies Law Tribunal (NCLT) for some or other corporate fraud case.
The view that is coming out after talking to audit firms is that banning the firm itself is not a solution and that this option should be used only in rare cases. They are also of the opinion that if at all, it is the partner who should be banned if he/she is found guilty of professional lapses.
Vishesh C Chandiok, CEO, Grant Thornton India LLP, says: "I'm pleased to note that banning of audit firms entirely will be restricted only for the rarest of occasions - liability should be proportionate to one's responsibility in something that went wrong."
The auditors' community is of the opinion that there are anyways few big audit firms and if the firm itself is banned from auditing, companies would be left with fewer options. Most of them are of the view that the country does not have enough big audit firms to compete with the big fours.
Bharat Dhawan, partner, Mazars, told Business Today that he was very happy with the order because to ban a large firm like PwC, which is so many partners and clients, would have adverse impact on many fronts.
He says the solution is not to ban the firm. "If the regulator or the courts find the firm was in wrong, other measures could be taken like monetary fine, embargo the partners and staff on the assignment."
He says that the audit profession needs to move forward with more reforms such as joint audits happening globally.
He also stressed on the need for creating bigger audit firms so that the dependence on the big-four is reduced.
However, a few smaller audit firms have said that bigger firms like PwC always get away with rap on the knuckles. They say with the kind of money, power and influence they have, the bigger firms always manage to wriggle out of such situations.