Auditors Ask Cos to Keep Their Books in Order Before April ’16, from when issues like fraud in a firm they examine could land them in jail. Under the new Companies Act, the board of directors and the auditors will be held responsible for fraud or discrepancies in company operations.
Auditors are prodding the companies they audit to set their house in order before April next year, from when issues like fraud in a firm they examine could land them in jail. Under the new Companies Act, the board of directors and the auditors will be held responsible for fraud or discrepancies in company operations.
Starting this year, directors will have to comment on the existence and effectiveness of internal financial controls in their board report. External auditors have one more year to report on their assessment of the existence and effectiveness of these controls, say industry trackers.
Once the regulations become applicable, the onus will lie on the auditors to ensure that the books of the companies they audit are clean. Starting 2016, the external auditor could face up to 10 years of jail term for failing to raise red flags about frauds.This risk has led to auditors, including the Big Four of PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte, pushing their clients to fix any deficiencies in internal controls.
Experts say many companies lack even the framework needed for controlling frauds. “While, right now, the responsibility to evaluate the internal financial controls and risk management systems of a company lies with the board of directors, the external auditors would be responsible for reporting any lack of adequate internal financial controls and, more importantly, the operating effectiveness of such controls beginning financial year April 1, 2016,” said Sumit Seth, partner, PwC.
The issues raised about material weaknesses are not just limited to fraud prevention. In one of the major listed companies headquartered in Mumbai, marathon meetings were held between the auditors and directors. The accountants who have been auditing its accounts for more than four years pointed out that the company has been overstating its goodwill, which comprise intangible assets like brand name.
“Most companies haven’t had much clarity on the control evaluation framework to be used or the extent of documentation required on internal financial controls, including those over operations. Now, as companies are making their initial assessments, they are largely seeing deficiencies and weaknesses arising out of the controls not being formalised or not being documented, thereby not having evidence or an audit trail to substantiate the existence or operating effectiveness of several controls,” said Sai Venkateshwaran, partner and head, accounting advisory services, at KPMG in India.
While there are some issues which are common among all companies across the board, some issues are sector-wise. Industry experts say there are some key areas where companies would look to ensure there are no material weaknesses in their control systems. “From a perspective of maintaining a sound internal control system, some important aspects where companies may want to focus include areas susceptible to significant fraud risks, revenue recognition, income tax, estimates related to goodwill or intangibles impairment, etc. Also there is no ‘one size fits all’ approach, as each industry sector will have its own peculiarities, like for pharma companies, among others, controls in the areas of revenue and distribution, inventory management and regulatory compliance would be key,” added Seth.