PROSECUTION FEAR Auditors are closely scrutinizing cos with high NPAs on balance sheets
As top auditors including the big four networks— fight it out to attract new clients as the compulsory audit rotation regulations are about to kick in, they are going out of their way to closely scrutinise companies that have stressed loans on their balance sheets. They avoid potential clients where they find a problem.
As top auditors including the big four networks— fight it out to attract new clients as the compulsory audit rotation regulations are about to kick in, they are going out of their way to closely scrutinise companies that have stressed loans on their balance sheets. They avoid potential clients where they find a problem.
The biggest concern for them is new provisions in the Company’s Act, besides reputational risk. Under the new regulations, auditors are required to disclose each and every risk in the company they audit every quarter. Audit partners can be prosecuted, even jailed, if they are found to be conniving with the company.
“The biggest risk is auditing the companies that have huge debt on their balance sheets,” said an audit partner at one of the big four. “We are involving our risk teams and forensic experts to have a look at these companies. In most cases we are politely declining their offer to audit these companies,” he added.
All Indian companies that have not changed their auditors for the past 10 years or more are required to change them by April 1, 2017, when the next fiscal year begins. While the auditors are too keen to audit as many companies as possible, and are in some cases even ready to reduce their fee, they don’t wish to take the risk that compa- nies with stressed loans bring.
The audit partners are calling up their forensic colleagues to look into certain companies and analyse the risks. In a recent case, a Mumbai-based company that has not yet defaulted any loans was under scrutiny. “Although it was not conclusive, we suspected that the promoter had in the past inflated cost of his infrastructure projects and may have siphoned off some money,” a forensic partner who led the investigation said.
The top auditors have also formed special risk committees. As a rule in these auditing firms, the risk committees’ approval is needed before accepting a new client. “The companies with non-performing assets are not even touched … companies with stressed loans are only selected if they are part of a bigger conglomerate or their promoters have some reputation in the market,” a risk head at one of the big fours said. In some cases, the firms are also using algorithms on the balance sheets of the companies before accepting them as clients. These specially designed algorithms throw up red flags in the financials of a company after going through large amounts of transactions. The activity around the upcoming auditor rotation is seen as the biggest such exercise globally. In 201617, about 800 companies that are audited by the big four will have to change their auditors, while by 2020, the number will be 2,500, said industry experts. For the big four, this is like a war to capture as many new clients as possible.
“We have a well-established client acceptance process which looks at suitability of company business, profile of management and promoters, independence checks and status of regulatory matters. We evaluate each opportunity on a case by case basis before accepting any client,”
“Our client acceptance process is fundamental to the assurance practice.”
According to industry insiders, audit firms are refusing even to appear before the audit committees of some companies with stressed loans. As per regulations, the audit committees at a company takes the call on the appointment of the new auditor. At most cases, these decisions would be made in the annual general meetings taking place in the coming months.
While the bigger audit firms reject the companies with stressed loans or potential frauds, it offers an opportunity for the smaller ones. In the coming years, even some of the top 500 Indian firms are expected face problem attracting top auditors. “This comes at a time when every auditor worth his salt is fighting hard to attract new clients, even by slashing prices, in some cases,” said the audit partner
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