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S. Murlidharan

S. Murlidharan on how the fence will continue to eat the crop

THE Exposure Draft SAP 4 — Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements — issued by the ICAI draws a line between employee and management fraud and fatalistically concedes that "the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud because those charged with governance and management are often in a position that assumes their integrity (sic) and enables them to override the formally established control procedures". A candid admission indeed. What it has left to implication is that when the fence starts eating the crop, the law is found to be out of its depths.

Internal audit can either take the auditor very far where the top management agrees to come under the auditor's lens or keep him confined to operational areas.

In this connection one wonders which of the two exactly is contemplated when the statutory auditor is called upon to comment upon the quality of internal audit by the Manufacturing and Other Companies (Auditor's Report) Order, 1988.

Presumably, the Central Government must have conceived a broader role for the internal auditor given the fact that a limited internal audit would leave large areas of an organisation vulnerable to the machinations of top management. Moreover, the language of the reporting requirement "whether the company has an internal audit system commensurate with its size and nature of its business" reinforces the view that a partial audit that blocks the internal auditor from looking into the actions of the top echelons is simply not on, farcical as it would be.

Yet, from the laconic one-line affirmation by the statutory auditor in most of the audit reports makes one wonder whether the internal audit in vogue in a given organisation indeed goes the whole hog. But then, it must be conceded that even if the internal auditor trains his sights beyond the humdrum of routine operations and targets the top management actions for his scrutiny, he is unlikely to pin the latter down, helpless as he is what with the top management invariably covering its grounds well.

Over invoicing of imports with concomitant kickbacks, under-invoicing of exports and scrap disposals with the difference being paid on the sly, and so on, are all done in cahoots with the other party to the transaction and unless the internal auditor goes through the meandering, labyrinth trail of the transaction, for which he admittedly has neither the requisite forensic skills nor the time, his report is bound to be uninspiring more so when the internal auditor happens to be the handmaiden of the top management which invariably is the case when the company has its own internal audit cell. And ironically, the law does not compel a company to appoint an outside firm as internal auditor.

Audit committees launched with a lot of fanfare do not hold much promise either because Section 292A(2) ties their hands — "they shall act in accordance with terms of reference to be specified in writing by the board."

Touché. In the event one can trust audit committee labours to bear no better results than the labours of joint parliamentary committees appointed at regular intervals in this country. The fence will continue to eat the crop.

With the introduction of the securitisation law recently, many dubious managements are shaking in their boots and the grapevine has it that some of the loot stashed away in distant foreign bank accounts are finding their way back if only to halt the newly-fangled banks and financial institutions in their tracks.

But the lot of non-promoter shareholders and unsecured creditors remains as vulnerable as ever.

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