Auditors seek fine-tuning audit report guidelines, approach Sebi, NFRA

Audit firms are seeking a rethink of new guidelines that require them to vet each whistleblower complaint and issue assessments on company’s financials.

These new disclosures and assessments are a part of the Companies (Auditor’s Report) order, or CARO, effective this financial year, where auditors are required to report more extensively on many crucial aspects including frauds, loan defaults, whistleblower complaints and benami properties.

According to auditors, most of the whistleblower complaints received by the companies are unsubstantiated, frivolous and anonymous, which even companies are reluctant to share. They feel that the auditors who are already facing an uphill task are not equipped to deal with the new process. Further, there has to be a segregation in the analysis of complaints and they should be restricted to financial frauds. According to the new provision, the auditor is supposed to verify each complaint received by the company and confirm it.

“The recent reporting requirements under auditor report, have greatly expanded the scope of scrutiny of auditors, particularly in respect of reporting of whistle blower complaints. Practically, auditors have come under immense pressure to verify these whistle-blower complaints, considering that they are now required to undertake a thorough diligence in respect of such complaints, in addition to their existing responsibilities. There certainly is an overlap between the function of an auditor and a company secretary, considering that an analysis of a whistleblower complaint would have a substantial secretarial analysis, which the auditor may not be fully equipped to process,” said Atul Pandey, partner, Khaitan & Co.

Under the new rules, auditors are required to comment on 50 such matters in their audit reports, against 21 earlier, which according to them adds pressure on those who are already under scrutiny due to various corporate governance lapses. Further, the new rules put the entire onus on the auditor, who largely relies on the information provided by the company.

For instance, auditors have to give their opinion on whether the company would be able to meet its liability for next one year. Again, an auditor can't judge and predict whether the company would be able to meet its liabilities in a year's time, especially amid extreme uncertainties due to the coronavirus (Covid-19) pandemic.

Madhu Sudan Kankani, partner, Deloitte India, said, "Some of the requirements of new CARO could be complex and may require detailed implementation guidelines. These may also require auditors to undertake new and additional audit processes to be able to report on those. For example, under the new rules, an auditor is required to opine on, based on all the information and knowledge they have and in their view, whether there are any material uncertainties on the company’s ability in meeting its balance sheet date liabilities, as and when they fall due within a period of one year from the balance sheet date. This requires exercise of significant judgement."

Similarly, an auditor is required to consider, while forming his opinion on the financial statements, all the whistleblower complaints. The companies will now need to institutionalise a process of collating such data and sharing with auditors. The auditor may need to evaluate each one of them to understand the impact these might have on the financial statements, and some of them may involve significant judgment and will require auditors to carry out our additional audit procedures, to ascertain their impact on financial statements and audit reports, Kankani added.

While, experts say it is a great step forward in the wake of recent frauds such as DHFL and IL&FS, certain aspects need to be considered. "Though there could be cases of frivolous complaints, we should recognise that insiders have the best knowledge of frauds and this source needs to be encouraged,” said Prithvi Haldea, founder, PrimeDatabase.