Satyam – What the auditors should check and report
This is the extract of the Auditors’ Report as required by the Indian Companies Act, 1956. Read it carefully, and you will be able to see what exactly the auditor should look at and report.
One has to note that the Auditors Report required under the Indian Companies Act, 1956 is very different from the Auditors’ certificate as per USA and other country laws.
Under those laws, much of the responsibility on the accounts is shifted to the management. Interestingly, this report doesn’t specify any IFRS or IAS to be followed but simply asks auditors to look at all things that may require a scrutiny, which is FANTASTIC.
227. Powers and duties of auditors
(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor.
1[(lA) Without prejudice to the provisions of sub-section (1), the auditor shall inquire-
(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;
(c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance-sheet is correct, regular and not misleading.]
Look at the provisions of Section 227 (1A) (b) – (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;
Did the auditors ensure that this is not the case before certifying the accounts of Satyam?
If yes, how did they ensure?
Difficult questions as the whole baloon of Satyam was blown up only with “book entries”. Instead of acting as book keepers, the Satyam finance department under instructions and intrusions of Mr. Raju, probably “book cooked”.
In addition to the above, subsection 3 of the same section 227 warrants the auditor to report this:
(3) The auditor’s report shall also state-
(a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
2[(bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company's auditor has been awarded to him as enquired by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report;]
(c) whether the company’s balance-sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns;
3[(d) whether, in his opinion, the profit and loss account and balance-sheet comply with the accounting standards referred to in sub-section (3C) of section 211;]
Make your judgement if the auditors of Satyam would have completely ensure compliance of accounts with the above requirements?
This is a follow-on post to:
http://www.sathyamurthy.com/2009/01/07/satyam-fraud-unravelling-the-mystery/
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[...] Satyam – What the auditors should check and report [...]
//227. Powers and duties of auditors
(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company//
There is enormous power given to the auditors by the above provision. Auditors have the right of access to books and accounts and vouchers of the company “at all times” not just at the time of audit. How many auditors really use this provision?
Won’t it be great if the auditors use this right, “right now”, to check the books and accounts and vouchers of other suspect companies? And even those that are not that suspect but have a “who knows?” hanging over their head… due to the exemplary performances reported year after year after year!
your points are very sharp for those not clear about accounting/audit procedures. grt reading thsi too.
Yes, I agree with Triplicani as for as the powers of auditors are concerned. Really powerful provision which is grossly under-used.
Prasanna
[...] Satyam – What the auditors should check and report [...]
I am very delighted to have read this article. I will definitely be interested clearing a few issues up.
- Are there any code equivalent to SARBOX or CADBURY on corporate GOvernance in India.
- And whats thefor PWC since in my opinion they may have overlooked the Company act of 1956 ( as to what they should have done)
- What about an Internal Audit function in Satyam over the years. Will be be happy for clarification on these.
Regards,
JW
Hi Julian,
Welcome and thanks for taking time to post your comments.
Yes. There is a strong corporate governance code in India which is equivalent of SARBOX. If you visit http://www.satyam.com and click the Investors link, you can access to the Corporate Governance declaration they Company filed for US ADR purposes. All declarations are made but if the intent is not right, all things get violated. My surprise is that when there are built in bells and whistles, no sound was heard until Mr. Raju chose to open up. This means there is surely a more than one man conspiracy in this whole episode.
Unfortunately, people who are selling off the stock do not take the Company separate from the perpetrator of the fraud though it is an artificial person by itself. It has the heart and mind of people who run it. Thus, if you do change the heart and mind with cleaner people, with the nerve system and veins being ok (the talented employees and the valuable customers) the Company should come back to better health.
I fervently hope that the Company will come back and will become a name to reckon with in the future. I did feel that there is no value left in the Company. But, I am inclined to change my pessimistic view after thinking deeply and taking comfort from the remedial actions taken by the Indian Government, even if late.
triplicani
Thanks for you response,
How about PWC and their credability now. How can investors feel secure having them as “watchdogs”.
Does this Scenario contributes in any way , shape or form to them loosing public confidence.
Regards,
Julian
Julian,
IMHO, it is not only PWC the credibility of whom would have taken a dent in this episode but also every single audit firm as Investors’ “take for granted” confidence on audited financials should have taken a dent.
In my personal experience, recently I got a mail from a Investment Analyst firm reiterating their “invest” stand on some other Company who has declared excellent results. I saw the results which are very good and the stock is at mouth watering price levels. In other times, I would have simply gone on to buy that stock. Now? I have sent a mail back to the analyst asking him one question, “how much reliable are these numbers”. I think more and more investors will ask this question.
I am disappointed that the primary trust on auditors that they are representatives of the shareholders has taken a beating. And it is not entirely auditors fault. It is also the fault of the investing public and the shareholders. How many times have we seen shareholders getting up and querying auditors regarding the accounts.
This episode may well start that trend. But with it, there might arise a situation of shareholder corruption.
– Companies wooing shareholders to keep their mouth shut.
Triplican,
One thing for sure is that Auditors are not liable because they express a mere “opinion”. I believe forensic accounting should pave the way as it relates to investment and determining stock prices.
Accounting princples are subjective and Satyam is my case in point. You know as an CA that any Inflation in Sales or tampering with Valuation of stock or COS impacts the reported earnings per share instantly.
I am a CA too but i am in the Non profit Sector so my terminology might be somewhat off.
would be happy to hear your thoughts.
Regards,
Julian
Hi,
In my Opinion PWC has failed miserably.
They were relied upon to Plan their engagement and review the books of SATYAM as prescribe by the relevant Auditing Standards and thereafter provide an opinion as to whether the Financial Statements are free from misstatements.
The fact that their procedures did not bring any irregularity to light then one have to think about their planning.
Did PWC took a risk based approach to this engagement?
What if RAJU did not confess this misgiving howlong it would taken the Big 4 auditors to reveal these findings given that they did.
Frauds of these nature cannot be avoided due to collution and other like strategy. But when they do occur As an investor i will be happy to know that they were caught by a system thats is set up to reveal just that.
The auditors did not assume the “watchdog” responsibility so they are stuck between a rock and a hard place.
Hope this is not too wordy…
Regards,
Julian
Frauds of these nature cannot be avoided due to COLLUSION and other like strategy. But when they do occur As an investor i will be happy to know that they were caught by a system thats is set up to reveal just that.
Pls forgive the TYPO for “collusion” in previous article
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