Governance

This article has been written by Ayush Tiwari, a student at the Symbiosis Law School, NOIDA. It aims to discuss the relationship between auditing and corporate governance and how both are very important to save a company from fraud and provide investors and other stakeholders with a sense of relief.

This article has been published by Sneha Mahawar.​​ 

Introduction

Through the corporate governance framework, large shareholders are ensured that they will receive a return on their investment. Effective corporate governance aligns the interests of company management with those of shareholders, lowering agency costs. Corporate governance has emerged as one of the most pressing challenges in today’s corporate world. Corporate failures, like those of Enron, WorldCom, the Bank of Credit and Commerce International (BCCI), Polly Peck International, and Baring Bank, have highlighted the issue, with various governments and regulatory agencies attempting to implement stringent governance regimes to ensure the smooth operation of corporate organisations and prevent such failures. These incidents, and more recently Satyam’s, have shown severe gaps in auditing. The greatest accounting scam in India, the Satyam scam, has harmed the auditing profession and exposed auditors’ inherent conflict of interest in the Indian corporate environment. As a result, this is a good moment to reconsider the auditor’s function in the corporate governance structure.

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What is corporate governance 

Corporate governance refers to the interaction that exists between the participants in establishing and implementing the goals of a corporate firm. The CEO, management, board of directors, shareholders, auditors, and audit committee collaboratively administer a company for the benefit of all stakeholders.

Strong corporate governance requires effective internal control systems, rules, procedures, and a group to guide management in order to satisfy the demands of all stakeholders. Corporate governance focuses on both the well-being of the management and the shareholders. Internal and external corporate governance benefits board culture, market share, future capital needs, and, most importantly, the trust of the shareholders in an organisation.

Corporate governance entails accepting management as trustees on behalf of shareholders in order to protect their rights as genuine owners of the company.  Since corporate governance is nothing more than ethics and moral obligations, it is about upholding organisational commitments to a code of behaviour, ethics, and values.

What is auditing

An audit is a formal review and verification of a company’s financial statements and records. It has become a crucial prerequisite for effective corporate governance since it plays a significant role in guaranteeing openness and accountability in corporate financial management; as a result, auditors are sometimes referred to as gatekeepers. A corporation operates with capital contributed by individuals who do not have authority over how the money is used. They would like to see that their investments are secure and being used for their intended objectives and that the company’s yearly reports offer an accurate and fair picture of the company’s state of affairs.

The firm’s accounts must be verified and audited for this purpose by a suitably competent and independent individual who is neither employed nor owed by or otherwise obligated to the company. The contract under which a firm’s auditor works for the company should be with the company as a distinct person. An auditor, like anybody who performs professional services for reward, owes the company an implied legal duty of care in and regarding the manner in which the audit is done.

Auditing is the formal inspection and verification of a company’s financial statements and records. It is described as a systematic and independent study of an enterprise’s data, statements, records, operations, and performances (financial or otherwise) for a specific reason. In any audit, the auditor observes and recognises the propositions under scrutiny, collects evidence, assesses it, and then formulates his conclusion, which is given in his audit report. The goal is then to provide a judgment on the sufficiency of controls (financial and otherwise) within the environment they audit, as well as to assess and enhance the efficacy of risk management, control, and governance processes.

Types of auditing

The auditing processes are mainly of the following types:

Internal auditing

Internal auditing is performed by the employees of a company or organisation. The corporation does not share these audits with the public. Instead, they are used for management and other internal stakeholders. By giving managers specific recommendations for enhancing internal controls, internal auditing helps businesses make better decisions. Additionally, they manage timely, fair, and accurate financial reporting while ensuring compliance with laws and regulations. Before enabling external auditors to analyse the financial accounts, management teams might use internal audits to find defects or inefficiencies within the organisation.

External auditing

External auditing, carried out by independent organisations and other parties, offers an honest assessment that internal auditors might not be able to offer. To find any significant inaccuracies or flaws in a company’s financial statements, external financial audits are used.

When an auditor offers a clear or unbiased opinion, it signifies that the auditor has faith in the correctness and completeness of the presentation of the financial statements.

External audits are crucial for enabling various stakeholders to make judgments about the organisation that is being audited with confidence.

External auditors are independent, which is the main distinction between them and internal auditors. It implies that they may offer a more objective assessment than an internal auditor, whose objectivity might be affected by the employer-employee relationship.

Tax audits

Tax audits are required by Section 44B of the Income Tax Act of 1961 in India. It mandates that the financial statements of anybody whose business had a turnover of more than Rs. 10 million in any prior year or has annual gross revenues of more than Rs. 5 million be audited by a chartered accountant who is independent of them.

It is to be noted that any entity, whether a person, corporation, partnership, or other entity, is subject to tax audits. If the tax audit regulations are not followed, there might be a penalty of 0.5% of the turnover or Rs. 100,000, whichever is lower.

There are currently no formal rules governing the hiring or termination of a tax auditor.

Corporate audit

A corporate audit must be performed in accordance with the Companies Act of 2013. Every financial year, all businesses, regardless of their kind of business or turnover, should have their annual accounts audited. The corporate directors can effectively complete this procedure by selecting an auditor for the audit. Additionally, the company’s shareholders appoint an auditor at each annual general meeting (AGM), who serves in that capacity until the end of the next AGM.

The Companies Act of 2013 states that auditors may be appointed for terms of up to five years. Auditors, however, cannot be appointed for more than one or two periods in the case of individuals and partnership businesses. An independent chartered accounting firm or individual may be chosen to serve as the company’s auditor.

Relationship between auditing and corporate governance

Modern corporations are the primary economic drivers in any country. The agency problem, which arises from the interaction between company management and shareholders, encompasses the corporate governance philosophy. A corporate governance system is characterised as a country-specific structure of legal, institutional, and cultural variables that shape the patterns of influence that shareholders (or other stakeholders) have on management decision-making. Corporate governance procedures are the strategies used to solve corporate governance concerns at the corporate level.

Auditing has discovered numerous corporate frauds in the past, and it is a vital tool for protecting investors’ interests. They are sometimes referred to as “gatekeepers” since they play a significant role in guaranteeing transparency and accountability in the business sector. Auditing is critical to public confidence in financial disclosures, particularly because an auditor is seen as a middleman between corporations and investors in relation to corporate financial statements. Auditors serve as the shareholders’ and potential investors’ eyes and ears; hence, the job of an unbiased, objective auditor is unquestionably necessary to create trust in the market and deliver a genuine and fair picture of the company.

Objectives and scope of auditing

Originally, the audit role served largely as a public service. Dicksee defines audit goals in his book “Auditing: A Practical Manual for Auditors” as follows.

  1. The detection of fraud.
  2. Detection of technological problems.
  3. The detection of errors of principle.

A detailed examination of transactions was used to reach such an aim. He highlighted the notion of internal control and stated that when a competent internal control system exists, a full audit is usually not required in its entirety.

With the passage of time and the expansion of organisations to the point where a much better internal system of control became economically feasible, a full audit of transactions became impracticable, and the audit function’s objectives shifted significantly. The auditor’s report on financial statements developed into a finished product rather than just evidence of the absence of fraud. The following are the goals of auditing financial accounts, according to the Institute of Chartered Accountants of India:

  1. The goal of auditing financial statements generated within a framework of accepted accounting rules and practices, as well as any relevant legislative requirements, is to allow an auditor to provide an opinion on such financial statements.
  2. The auditor’s opinion aids in determining an enterprise’s accurate and fair picture of its financial status and operating results. However, the user should not believe that the auditor’s view guarantees the enterprise’s future viability or the efficiency or effectiveness with which management has managed the enterprise’s affairs.

As a result, the primary goal of auditing nowadays is to evaluate financial statements to determine if they accurately and fairly depict the organisation’s financial situation. The detection of fraud and mistakes is only an incidental objective. An auditor is frequently in a position to detect fraud. If fraud is uncovered after the auditor has completed his audit, it does not necessarily imply that the auditor was careless or did not fulfil his responsibilities completely. The auditor does not ensure that no fraud exists until he has signed the report on the accounts. If he conducted his audit with due care and skill in accordance with the professional standards required, the auditor would not be held liable for failing to detect the fraud.

Qualifications and disqualifications of an auditor

An auditor in India is a chartered accountant appointed by the Chartered Accountants Act of 1949 to review the books of accounts and accounts of a company registered under the Companies Act of 2013, and report on them to the firm’s shareholders. A firm may be appointed in its own name if the majority of its partners practising in India are eligible to serve as auditors. When a firm, including a limited liability partnership, is designated as a company’s auditor, only the partners who are chartered accountants are authorised to act and sign on the firm’s behalf.

An auditor is an official of the company for the purposes of misfeasance summons under Section 212 of the United Kingdom’s Insolvency Act 1986, as well as criminal offences like fraud, deception, etc. When an auditor is employed to conduct and carry out the audit function without being appointed as an auditor, he may not be considered a company official.

The following individuals are ineligible for appointment as a company’s auditor under Section 141(3) of the Companies Act, 2013:

  1. a legal entity that is not a limited liability partnership formed under the Limited Liability Partnership Act of 2008.
  2. a company officer or employee;
  3. a person who is a partner or who is employed by a company officer or employee;
  4. a person who, or his relative or partner
  1. owns any security or interest in the firm or any of its subsidiaries, or in any of its holding or associate companies, or in a subsidiary of the such holding company;
  2. owes money to the firm or a subsidiary of the company;
  3. has granted a guarantee or supplied any security in connection with any third party’s debt to the firm or its subsidiary;
  1. a person or corporation that has a commercial link with the company, its subsidiary, or its holding or associate company, whether directly or indirectly;
  2. a person whose family is a director or works for the firm as a director or senior management employee;
  3. a person in full-time employment elsewhere, or a person or a partner of a company holding appointment as its auditor, if such person or partner is holding an appointment as auditor of more than twenty companies on the date of such appointment or reappointment;
  4. a person who has been convicted by a court of a fraud-related offence and a ten-year period has not expired from the date of such conviction; or,
  5. any individual whose subsidiary, associate company, or another form of entity is engaged in consulting and specialised services as defined in Section 144 on the date of appointment.

Responsibilities of an auditor

Presenting an audit report

An auditor’s principal task is to review all of the company’s financial statements and account for any errors. The primary responsibility of an auditor is to provide the firm with his opinion, in the form of an audit report, on whether or not the financial statements present an accurate and fair picture of the status of the company’s operations. The auditor must ensure that the report produced complies with the applicable provisions of the Companies Act.

Reporting fraud

If an auditor discovers that the company is not keeping adequate books of accounts, he or she must alert the company, and if no action is taken by the director, the auditor must contact the registered office of the company within seven days.

The audit report of a government firm

The auditor of a government company will be appointed by the Comptroller and Auditor-General of India, and he or she will perform in accordance with their directions. He must give a report to them detailing his actions and the impact on the company’s finances and financial statements.

Within sixty days after receiving the report, the Comptroller and Auditor General of India shall have the authority to (a) undertake a supplemental audit and (b) comment on or update such an audit report.

The Comptroller and Auditor General of India may order a test audit of such a company’s finances.

Liability to pay damages

According to Section 245 of the Companies Act, 2013, the depositors and members of the company have the right to make an application before the tribunal if they believe that the administration or conduct of the company’s activities is harmful to the company’s interests.

They also have the right to seek damages or compensation from the auditor, including the audit firm, for any incorrect or misleading statement of particulars contained in his audit report, as well as for any fraudulent, illegal, or wrongful act or behaviour.

Branch audit

Where a business maintains a branch office, the accounts of that office must be audited by the auditor designated for the company or by any other person competent for appointment as the company’s auditor. The branch auditor shall make a report on the accounts of the branch reviewed by him and submit it to the company’s auditor, who shall address it in his report in the manner he deems necessary.

Auditing standards

Every auditor must follow the auditing guidelines. In cooperation with the National Financial Reporting Authority, the Central Government should notify these criteria. The government may further specify that the auditors’ report contains a comment on the subjects specified.

Winding up

According to Section 305, it is a legal requirement that an auditor attach a copy of the business’s audits completed by him when the firm is willingly wound up.

Roles of an auditor in corporate governance

Protection of stakeholders’ interests

Auditors frequently have access to vital information on various activities carried out in the organisation, which makes them aware of mismanagement. Here, the auditor has the chance to alert management of policy flaws while also bridging the gap between stakeholders and management. This information exchange has the potential to improve corporate governance.

Increasing accountability

Occasionally, auditors at an organisation become aware of numerous misstatements and falsified figures. This is the moment when the auditor might suggest sanctions for any corporate manipulation. This will aid in instilling a feeling of accountability in all stakeholders and will also assist the Board of Directors in identifying those who are not displaying professionalism in their job. Penalties can take numerous forms, such as removing a person from a certain job, postponing a promotion, cutting the yearly bonus, and so on.

Crisis management

Larger organisations will face a financial crisis at some point. This can be attributed to any fraud or corruption within the organisation as well as any external claim. In such cases, the auditor is supposed to have an action plan available that includes allocating distinct roles to different administrative stakeholders. The goal of this action plan is to keep investors’ trust in the firm alive. It also contains measures pertaining to the media and law enforcement officers.

Reduction of risk factors

Auditors frequently conduct risk assessments to guarantee the smooth operation of the organisation. During these risk assessments, they examine all of the hazards that might lead to a company’s downfall. They also examine all of the steps taken by a corporation to guarantee that there is no corruption inside the organisation.

The auditors develop an action plan to remove or decrease all risks after analysing all risk variables. Every risk assessment performed by an auditor checks to see if the company has taken measures to mitigate previously documented risks.

Maintaining relationships with regulators

The majority of regulators and shareholders need openness in the activities in which they are involved. External auditors frequently go to great lengths to ensure that the company’s activities are transparent, which aids regulators in conferring trust in the firm. When auditors attest to the company’s disclosures, regulators become supportive.

Role of SEBI in auditing and corporate governance in India

In order to safeguard investors’ and issuers’ interests, SEBI has established corporate governance principles under which the securities market must function. SEBI has the authority to look into situations in which the market or its participants have been affected and to impose governance norms under the directive. Accountability and openness are guaranteed through an established appeals procedure. If a firm doesn’t follow its governance rules and regulations, SEBI has the authority to remove it from the securities list.

The following are crucial components of good corporate governance:

  • Transparency;
  • Accountability;
  • Disclosure;
  • Equity;
  • Equity;
  • Rule of law.

Audit processes 

To make sure the procedure is thorough and efficient, the following procedures would be done annually:

  1. The audit shall be carried out in accordance with the SEBI-issued Norms, Terms of Reference (TOR), and Guidelines.
  2. The board of the Stock Exchange / Depository shall select the auditors in accordance with the established auditor selection norms and TOR. Stock Exchange / Depository (Auditee) may negotiate. A maximum of three consecutive audits by the auditors are permitted. SEBI must receive the auditor’s proposal for records.
  3. The audit schedule, along with the details of the current and past audits, must be provided to SEBI at least two months in advance.
  4. Taking into account the developments that have occurred over the last year or after the release of the previous audit report, SEBI may decide to expand the audit’s scope.
  5. An audit must be done, and the auditee must receive the audit report. Specific compliance or non-compliance concerns, observations of small deviations, and qualitative comments on areas for development should all be included in the report. The report should also evaluate any outstanding issues from earlier audit reports.
  6. The management of the auditee offers its opinion on the nonconformities (NCs) and conclusions. Specific remedial actions must be done for each NC within a 3-month time frame and reported to SEBI. If a follow-up audit is necessary to assess the status of NCs, the auditor should say so. Within a month of the auditor’s conclusion, SEBI must receive the report and management comments.
  7. To be sure that the corrective steps have been done, a follow-up audit, if any, must be planned within three months following the audit.
  8. If a follow-up audit is not necessary, the auditee’s management must provide the auditors and SEBI with a report detailing the corrective measures they have implemented within three months. This report needs to include an updated issue log that shows the remedial measures that have been done and have been audited.

Terms of Reference (ToR)

  1. General Controls for Data Center Facilities
  2. Software Change Control
  3. Data communication / Network controls
  4. Security Controls – General office infrastructure
  5. Access policy and controls
  6. Electronic Document controls
  7. General Access controls
  8. Performance audit 
  9. Business Continuity / Disaster Recovery Facilities
  10. IT Support & IT Asset Management
  11. Entity-Specific Software
  12. Any other Item like electronic waste disposal or based upon previous audit reports as well as any other specific information given by SEBI

Guidelines for audit reports

Each major area included in the TOR should be explicitly covered in the audit report, along with any nonconformities (NCs) or observations (or lack thereof). Auditors should offer qualitative suggestions for how to enhance each section of the process based on the best practices they have seen. Additionally, tabulated data displaying NCs and observations for each major area in TOR should be included in the report. Reports should be presented in full detail, coupled with an executive summary in tabular format. A summary comment from the auditors should be included in the executive summary as well, indicating if a follow-up audit is necessary and the deadlines for the various remedial actions for non-conformities. The stock exchange/depository must additionally provide a declaration from the MD/CEO attesting to the integrity and security of IT systems in addition to the audit report.

Audit committee 

The composition and role of the committee have been given under Section 177 of the Companies Act, 2013, and Regulation 18 and Part C of Schedule II SEBI (LODR) Regulations, 2015. A company’s audit committee is essential to internal financial control and aids in risk management. Therefore, a company’s constitution is a crucial component.

Composition of the audit committee

According to the provisions of the Companies Act of 2013, the audit committee shall include a minimum of three directors, with a majority of independent directors. In accordance with the Companies Act, such individuals who can read and comprehend financial statements must be assigned to the audit committee. This provision also applies when appointing a chairperson.

The SEBI (LODR) Regulations 2015 stipulate that the audit committee shall have at least three directors. Additionally, the audit committee should include two-thirds of independent directors. A director who is independent must chair the audit committee. All members of the audit committee should be financially literate, and at least one of them should be an accounting or related financial management specialist.

Meetings to be held by the audit committee

The Companies Act of 2013 does not stipulate how often the audit committee must convene. However, subject to any legal requirements, the audit committee should convene as often as necessary.

According to the SEBI (LODR) Regulations 2015, the audit committee must meet at least four times each year, and no more than 120 days cannot pass between sessions. A minimum of two independent directors, as well as two members of the audit committee, should constitute a quorum for such a meeting.

Power of the audit committee

Under Companies Act

According to the Companies Act of 2013, the audit committee has the following powers:

  • to request auditors’ opinions on internal control mechanisms, the audit’s scope, and the financial statement before the board is notified; to discuss any concerns with the company’s management and with the internal and statutory auditors;
  • to look into a matter involving the company, the committee may seek expert opinion from other sources. The committee has the authority to look up information in the company’s records.

Under SEBI guidelines

The following powers are granted to the audit committee under the SEBI (LODR) Regulations 2015:

  • to look into a situation within the parameters of the investigation;
  • to ask any employee for information;
  • to seek outside legal or other expert counsel;
  • to invite outsiders with the necessary skills if necessary.

Roles and objectives of the audit committee

Under Companies Act

Every audit committee must abide by the written terms of reference specified by the board, as per Section 177(4) of the Companies Act, which will include:

  • the suggestion for the selection, compensation, and terms of the company’s auditors;
  • review and keep an eye on the auditor’s performance and independence, as well as the efficiency of the auditing process;
  • review the auditors’ report and the financial statement;
  • modification or approval of business deals involving related parties. According to the requirements outlined in Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014 the audit committee may grant omnibus approval for related party transactions that a company has proposed entering into.

Under SEBI guidelines

The duties of the audit committee are outlined in Part C, Schedule II, of the SEBI (LODR) Regulations. It includes the following:

  • monitoring the listed entity’s financial reporting procedure and the disclosure of its financial data to verify the information’s veracity and accuracy;
  • recommend the selection of auditors for listed companies, as well as their compensation and terms of employment;
  • giving statutory auditors the go-ahead to be paid for the services they provided;
  • Before submitting it to the board for approval, carefully analyse the annual financial statements and auditors’ report, paying particular attention to the following:
  1. Issues should be addressed in the directors’ responsibility statement
  2. modifications to accounting policies and procedures, including any explanations;
  3. significant accounting entries;
  4. significant financial statement modifications resulting from audit findings;
  5. Compliance with listing requirements and other legal obligations for financial statements;
  6. RPT disclosures;
  7. Modified opinion in the draft audit report.
  • to examine quarterly financial reports before submitting them for approval to the board;
  • defining and disclosing material modifications as part of the policy on the importance of RPTs and how to deal with them;
  • If the transaction’s value during the fiscal year exceeds 10% of the listed entity’s annual consolidated turnover as determined by its most recent audited financial statements, the RPT must have approval from the audit committee of the listed business;
  • evaluate the statement of the usage of funds received through an issue, the statement of money utilised for purposes different than those listed in the offer document, prospectus, or notice, and suggest to the board that action be taken in this respect;
  • examine and keep an eye on the auditor’s performance, independence, and effectiveness;
  • approving or a subsequent change in transactions involving a listed business and linked parties;
  • examine investments and loans made between companies;
  • evaluation of internal financial controls and risk management systems;
  • evaluation of internal financial controls and risk management systems;
  • to evaluate the effectiveness of external and internal auditors, as well as the suitability of internal control systems;
  • To assess the effectiveness of the internal audit function, taking into account the department’s structure, staffing, and seniority of the manager, as well as the department’s coverage of the reporting structure and frequency;
  • Talk to internal auditors about any significant findings;
  • to consult with statutory auditors regarding the type and scope of the audit before it is completed;
  • to examine the reasons behind significant payment failures to shareholders, creditors, debenture holders, and depositors;
  • analysing how the whistleblower mechanism operates;
  • after evaluating the applicant’s qualifications, to approve the CFO’s appointment;
  • performing any additional duties outlined in the audit committee’s terms of reference;
  • to assess the holding company’s involvement in a subsidiary that exceeds 100 crore rupees or 10% of the subsidiary’s asset size, whichever is lower, and includes any existing loans, advances, and investments.

Auditor’s responsibilities in the event of fraud detection

As previously said, auditors are frequently in a position to detect fraud. When an auditor discovers that a senior employee of a firm has been defrauding that company on a large scale and is in a position to continue doing so, it is typically the auditor’s responsibility to immediately disclose what has been discovered to the company’s management. The ICAI Auditing Guidelines, 2000, additionally provide that if an auditor suspects the presence of fraud, another irregularity, or an error while performing his or her duties, the following action should be taken. The auditor should make every effort to determine if fraud, other irregularities, or errors have happened; nonetheless, if fraud by senior management is suspected, the auditor should notify senior management of his concerns. In the event of major fraud or irregularities that are likely to result in financial benefit or loss for any individual or a large number of people, the auditor may report immediately to a third party without the knowledge or approval of management. In this perspective, the Enron and Satyam Computer scams are notable examples of major fraud committed with the assistance of their auditors and auditing companies.

The Enron scandal

In the case of Enron, a Texas-based energy corporation, financial relationships between the firm and some board members were used to negotiate the independence of the Enron Board of Directors. Two directors each invested more than $1 million in Enron stock and have a strong financial motive to keep the firm afloat. Even they did not stop them from siding with Enron’s management on several situations when they should have opposed. Auditors are appointed by the board of directors (auditing committee) with the goal of conducting audits in an objective, deliberate, and professional way. The auditor should be independent in order to protect the interests of shareholders and other stakeholders, but how can this be done if the board of directors is not independent?

The auditor’s independence is jeopardised due to his strong contact with management. Many times, management complied with auditors by providing non-audit services, earning their favour through the presentation of misleading financial statements.

In the case of Enron, the board of directors was not independent, which is why the auditor failed to do his duty. Despite the fact that Arthur Anderson was Enron’s external auditor, the board allows him to serve as an internal auditor and provide consulting services. Arthur Anderson received US$ 55 million for non-audit services in 2001. The roles of the auditor and audit committee were called into question in this case. Auditors must rely on management for their livelihood and have excellent working relationships with them. If they qualify the report or identify the wrongdoings of the management, it is unlikely that they will be selected in the future.

Anderson was reporting on the company’s accounts at Enron, and he did not report fraud to shareholders and other stakeholders because it was committed by management. If auditors have reported, they may not be appointed in subsequent years. Hence, the auditors made certain that they were in good books of management.

The Satyam scam

In this incident, Ramalinga Raju and his brother Rama Raju founded Satyam Computer Services Ltd. in 1987 as a private enterprise with only 20 employees in order to develop software and provide consulting services to large corporations. B. Ramalinga Raju, Satyam’s founder and former chairman, acknowledged on January 7, 2009, orchestrating an accounting fraud on Satyam’s accounts. Satyam Computer Services Ltd. was a publicly traded private corporation that was among the most well-known software companies in the country. Satyam’s shares were listed on the New York Stock Exchange, the Bombay Stock Exchange, and the National Stock Exchange of India as a publicly traded company. This indicated that Satyam had to follow Clause 49 of the Sarbanes Oxley Act, as well as any other applicable rules and regulations. Ramalinga Raju, the co-founder and chairman, retained control of Satyam even after it went public. The company had an optimal combination of non-executive and executive directors, an independent audit committee, a nomination committee, and independent pay committee directors. Satyam’s downward spiralling impact was found in two stages. Satyam’s books of accounts contained fabricated accounts after a related party deal that included the company’s promoter failed. Satyam’s problems began when its chairman issued a $1.6 billion bid for two Maytas organisations, namely Maytas Properties Ltd. and Maytas Infrastructure Ltd., both of which Raju’s family promoted and controlled. Despite reservations expressed by a few independent directors, the board opted unanimously to proceed with the scheduled transaction. Satyam informed the stock exchanges of the board’s approval, as required by the listing agreement. Satyam was compelled to withdraw Mayta’s proposal within eight hours of its introduction, owing to a poor market reaction. Finally, on January 8, 2009, Ramalinga Raju unexpectedly resigned as Satyam’s chairman after confessing to a Rs. 7,800 crore financial scandal. Raju and his brother covered up the swindle in front of the company’s board, top management, and auditors. Ramalinga Raju fabricated data totaling Rs. 5040 crores in false currency and bank accounts, rather than Rs. 5361 crores.

There was no accrued interest of Rs. 376 crore, in addition to an underestimated liability of Rs. 1230 crore owing to money created by Raju and an inflated debtor’s position of Rs. 490 crore. As a result, only family members had complete access to the information. Satyam, previously India’s fourth-biggest IT business with a well-known clientele, became implicated in the country’s largest scam. The CEO, Srinivas Vadlamani, the CFO, and other directors of Satyam (PwC) bribed the auditors with a large sum of money to misrepresent the company’s financial statements, conceal fraud, and entice investors to part with their hard-earned cash. PwC served as Satyam’s auditor from 2000 to 2008 by maintaining a positive relationship with management. This fraud was carried out with the assistance of the worldwide reputed audit company PricewaterhouseCoopers (PwC), which is a major setback for corporate governance in India. This audit firm failed to identify any fraud and validated thousands of crores of rupees in bank accounts that did not appear to exist at all. 

Conclusion

The audit is supposed to analyse the accounts kept by the directors in order to notify investors of the real financial status of the firm. The audit is designed to safeguard investors. The auditors do have a chance to make a thorough check of the accounts, call for the information, and satisfy themselves that the accounts have been fairly maintained and the balance sheet is fairly drawn up. The auditors do have to act in good faith and efficiently to check the accounts and certify the balance sheet of the company. Therefore, it is the responsibility of the auditors to protect the interests of investors in relation to the actions of the directors when they ostensibly behave in accordance with their authority while handling company assets. It is the auditor’s responsibility to find any unlawful or improper dealings, so it is crucial that they utilise their abilities and conduct a reasonable analysis of the books to ensure this. Auditing is a crucial tool for defending the rights of investors because it has already exposed several corporate crimes. Auditors are sometimes referred to as the company’s gatekeepers, eyes, and ears since they play a significant role in maintaining openness and accountability in the corporate sector.

It is also true that fraud may be discovered after the auditor has finished his audit, but this does not necessarily indicate that the auditor was careless or did not entirely fulfill his obligations. He examines and confirms the company’s records, finances, and certificates that are in front of him. The auditor would not be held liable for failing to uncover such fraud if he had done his audit with the necessary care and skill in accordance with the anticipated professional standards. As a result, it is expected that the auditor will perform a careful audit of the business.

References

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