Were the auditors negligent?

Most standard textbooks on auditing will tell you that the primary purpose of an audit of a company is to establish the truth and fairness of the company’s Financial Statements and not the detection any frauds. "The auditor is not a bulldog but only a watchdog". In the same breath and in the same vein those books will also aver that if an audit is properly conducted frauds will surface and that they should be thoroughly investigated.

"Among the cardinal aspects of a proper audit is the verification of assets of the company. This means the verification that the stated assets do in fact exist, are factually and legally owned by the company and are being used by the company or at its disposal for use by the company. The fixed assets are more or less the permanent assets of the company or the foundation on which the company functions. The current assets are the fluctuating assets of the company which are available to meet the current liabilities that fall due for payment in the near future. Technically, a company is deemed bankrupt if it fails to meet its obligations as and when they fall due for payment.

This verification of assets by the auditor is an onerous duty. It has to be carried out with due care and diligence. Any negligence in this respect will vitiate the entire audit process and render the Financial Statements useless as well as fraudulent. Thus we find that the head of one of India’s biggest outsourcing companies, Ramalinga Raju of Satyam Computer, admitting the incredible; that his company had overstated cash and balances to the tune of US$1.03 billion over several years. The immediate unavoidable question is what sort of audit was done on this company’s accounts. A fraud of this nature surely could not have escaped a proper audit done with due care and diligence and if proper verification procedures had been followed.

I raise this same question with regard to Sackvithi’s accounts, Golden Credit Card Company’s accounts and Danduwan Mudalali’s accounts. Given the magnitude of the fraud/losses of assets involved, it really is time to ask the respective auditors why they failed to detect these frauds. If any of the auditors had certified the above accounts as "true and fair" then there is a prima facie case against them. The Dept. of Trade should take up this matter up immediately and the Ethics Committee of the professional accounting bodies should also probe this matter urgently, notwithstanding the fact that the shareholders/the investors have the right to pursue a class action for damages against the said auditors. The Registrar of Companies should also take action against the filing of fraudulent accounts with him by the companies concerned.

Cosy relationships with CEO/directors of companies and heavy dependence on fees from few companies by auditors, have led to their downfall and the publication of many a fraudulent set of accounts of big league companies to the victimization of many investors. In the case of finance institutions it is probably right to require that the auditors do a thorough investigation of the assets of the companies concerned and report that they have actually carried out such an investigation and vouch for the factual existence and legal ownership of those assets as these assets can be easily purloined by the bosses of such companies.

www island.lk

Copyright©Upali Newspapers Limited.

Hosted by


Upali Newspapers Limited, 223, Bloemendhal Road, Colombo 13, Sri Lanka, Tel +940112497500