Auditing audit process

Accelerating change has characterised the global business landscape for many years. Several factors such as rapidly evolving technology, newer financial instruments, complex regulatory environment, increasingly integrated global economy, and competition are creating new risks and opportunities for organisations. Amidst all this the role of the chief finance officer (CFO) has also evolved. Whereas earlier chief finance officers used to focus on value preservation, today their role encompasses strategic and consultative roles driven by the needs of business and leading to value creation.

This also calls for transformation in the way that audits are conducted. While the primary objective of an audit – to provide reasonable, but not absolute, assurance that the financial statements prepared by the management are fairly presented – has largely remained the same, changing times have led to an evolution in the profession. Large auditing firms need to provide chief finance officers with much needed agility and embracing a multidisciplinary model (MDM) is one way to strengthen as well as broaden the audit function.

Audit firms that employ a broad range of skilled professionals with diverse backgrounds and competencies will help keep up with the growing demands of stakeholders. A multidisciplinary approach is also imperative given the increased scale, complexity and global reach of Indian companies. The world’s largest and most complex companies rely on firms with multidisciplinary model to conduct their financial statement audits since such firms are widely considered the best equipped in terms of experience, industry knowledge, technical expertise, resources and geographical reach required to handle the magnitude and depth of such audits.

However, in recent years there has been public glare on the way audit firms in India function with the Supreme Court directing the ministry of corporate affairs to ascertain if they are working in contravention of existing Indian laws and statutes, and to recommend the way forward. Questions are also being asked about large audit firms providing non-audit services – such as advisory and technology consulting – and whether a multi-disciplinary approach is indeed effective.

Discouraging a multi-disciplinary model could bring in stagnancy and limiting the auditing profession to only vetting accounting standards could also make them irrelevant in the long run. At present, the code of ethics of the Institute of Chartered Accountants of India (ICAI) specifies that a member cannot enter into a partnership with any person other than a chartered accountant in practice. As a result, audit firms in the country can only have partners who are chartered accountants. Thus, for expertise in areas other than accounting, which may be necessary in order to complete a ‘broad spectrum’ audit, these firms have to look to appropriately qualified professionals outside of their organisations.

For success in today’s business environment, companies need a thorough understanding of and access to key skill sets such as IT/cyber, taxation, forensics and valuations that add value to the core audit function. When specialised professionals belonging to different disciplines align within a multidisciplinary model, the firm is empowered to undertake work of greater magnitude and challenges. Although the nature, extent and timing of their involvement could vary, the tangible expertise and fresh perspective this brings about is beneficial.

If specialists are directly employed by large audit companies then it results in everyone involved in the process being bound by the same standards of quality and ethics intertwined in a single culture and brand. Contracting external experts for varying durations may impact the overall audit quality negatively as they will lack necessary common attributes and values, which full time specialists share with the company. Thus, it is imperative that companies adopt multidisciplinary business model to help clients navigate complex situations and mitigate enterprise risk.

Finally, there is a need for a modern regulatory framework. The central government’s proposal to set up the national financial reporting authority (NFRA) under section 132 of the Companies Act 2013, with the intent to serve as an independent regulator for the auditing profession is indeed an encouraging step in this direction. The national financial reporting authority will play a key role in ensuring accountability through the formation of accounting and auditing standards and polices to be adopted by both companies and auditors.

If the multidisciplinary model is considered appropriate as posited in this article then the scope should be enlarged to include the role of such professionals/specialists who as part of audit companies will help deliver value to companies and by extension their stakeholders.

 (The writer is managing director, IMFA – India’s leading, fully integrated producer of ferro alloys)