Corporate failures: Auditors are easy targets for blame

Among other things, the risk management practice prevalent in SVB is an important aspect which should be given due consideration. Were these practices so poor that they could not have anticipated the impending crisis? Equally important is the reaction of the Board of Directors of the bank, which was desired. It becomes even more important to always be prepared with crisis-resolution plans when one is in a trustworthy business like SVB, which in this particular case has been a colossal failure.

The SVB collapse has once again put the spotlight on the question of who should be held responsible in the event of a corporate failure. In such cases, statutory auditors are easy targets, as they are the ones who sign off on a company’s accounts and are required to evaluate the firm’s ability to survive in the coming year. Any major corporate failure has a huge economic impact, especially when it is a surprise, with little indication of impending failure beforehand. With so many participants overseeing various aspects of financial reporting, including company management, internal auditors, the board and its committees, and statutory auditors, whose responsibility should this be? Or can such failures be safely attributed to a weak regulatory framework?

When such failures occur, it becomes important to review and redefine the distinct roles of each participant in the financial reporting ecosystem, such as management, the audit committee and the independent auditor. Management is responsible for preparing the financial statements, establishing and maintaining adequate internal controls over financial reporting, evaluating its effectiveness, and for efficiently running the affairs of the company.

According to TransUnion CIBIL data, India had 15,778 willful default accounts worth $41.3 billion as of December 2022, compared to 14,206 accounts worth $34.1 billion a year ago. Total outstanding on top 50 willful defaulters 92,570 crore to Indian banks by 31 March 2022. While the audit committee is an integral part of this financial ecosystem, its primary function is to oversee financial reporting and related internal controls. The independent auditor is responsible for expressing an opinion on the fairness with which the financial statements present, in all material respects, the financial position, results of operations and cash flows are consistent with defined accounting principles.

There is a need to better define the responsibility and accountability of the audit committee as well as the auditors and of course the management. With so many stakeholders involved in financial reporting, auditors alone cannot be held responsible for the challenges faced. There is an urgent need to explore and find ways and means of improving the role played by the Audit Committee. For example, audit committees need to become more involved and responsible by expanding their role beyond post facto analysis and firefighting, which is now the case. In addition, corporate boards need strong leadership from these audit committees to navigate these complex financial reporting environments, provide independent assurance, and keep the company on a solid path supported by a strong regulatory framework.

India’s macro-economic environment is creating several challenges for the audit industry in the country. This is further exacerbated by the narrative built around the auditing profession. It is well known that the availability of reliable financial information on the performance of companies is vital for the proper functioning of any market economy. In present times where the integrity of auditors in the discharge of their duties is questioned, such skepticism has the potential to bring down the entire system. Citing examples of auditors being subject to stringent criminal proceedings initiated in several cases in the recent past, other professionals have opted out of applying for audit roles. Add to this the social and professional stigma that attaches to individuals in the audit profession, as they often end up as the focal point of the blame game. Clear understanding of roles and responsibilities in All Levels can change this; Otherwise, the reason for delegating accountability will keep slipping.

Independent audits are also fundamental to making informed and sound investment decisions. This requires the preparation and presentation of reliable financial statements to the corporate management and board. For this it is important that each key element that is part of this ecosystem is both empowered and accountable.

In order to foster a business-friendly environment for corporations and professionals in India, participants in the financial reporting ecosystem must interact with each other in the process. Also, our laws and regulations on professional services must keep pace with changing market dynamics.

The accountability mechanism for auditors needs to be addressed. Failure to address this could keep high-quality talent away from the profession and create a climate of fear among auditors who want to be forced out of the profession, all of which would further compromise rule-compliance and adversely affect investors. Will make an impact.

Bikas Narayan Mishra is an advisor to the Indian Banks’ Association and a former banker.