Would it not be wonderful if the world would have been fraud-free; all businesses performing virtuously; all human behaviors standing on ethical platforms? But this is not to be. Fraudsters and tricksters are all around us.

Society, therefore, has built-in checks and balances to make the world as much tidy and fair as is feasible. One of the foundations to build a cleaner business world is the ‘statutory auditors’.

The key question is – what if the auditors do not perform their tasks diligently?

Here comes the auditor regulator, which is known in India as the National Financial Reporting Authority (NFRA). This independent body overlooks the accounting and auditors of listed and large companies.

It is five years since NFRA got established. Being young, there are gaps in the understanding of the Indian commercial world as to what this regulator is doing.

Hard facts are tough to digest

Let me tell you a few of the recent orders of NFRA where they have pulled up the auditors for lack of proper work. In fact, auditors partaking in ‘fraud’ was the underlying message.

While NFRA orders address various shortcomings, I am highlighting just a few hard observations, to depict the type of concerns the regulator is displaying.

• Coffee Day Enterprises Ltd’s Order: I love the daily dose of caffeine shot from the Café Coffee Day’s vending machine in my office. But did not like the news of this listed company diverting over Rs 3,500 crore for personal purposes. One of the serious problems pertained to the company giving an advance of a whopping Rs 3840 crore to a related party for the purchase of coffee beans during FY 2018-19. But believe it or not, the amount of coffee actually purchased was only Rs 70 crore (even the previous year’s purchase was Rs 40 crore). It may be noted that the company Coffee Day Global Ltd, which is the sole buyer of beans and the largest group company, had the previous year’s turnover of only Rs 1800 crore. Incidentally, the Audit Committee gave prior approval for advancing only Rs 500 crore.

Just review the transaction. Giving the advance of such a mammoth sum in comparison to the actual purchases, and that too to a related party, is a definite red flag for any auditor or accountant. Doesn’t it smell fishy?

This is even without considering the adverse NFRA observations of related party transactions of over 10 percent of revenue being undertaken without shareholders’ permission; arm’s length pricing not being established; risk of material misstatements ignored; and non-matching of purchase and sale transactions between the giver and the taker, by the auditor. All signs were pointing towards company money being used for probable fund diversion. A serious ‘fraud’ red flag.

• Anshu’s Clothing Ltd (renamed Aditri Gems & Jewels Ltd)’s case: When loans are taken by any business, the interest on the borrowed money needs to be shown as a cost in the P&L account. This is whether the loan is being serviced or not. No justification for non-provisioning of interest liability exists even if the repayment of loan liabilities is being renegotiated with the lender.

This is what happened in this listed entity where Rs 144 lakhs of interest was not provided for. Had the interest accrued been properly accounted for, the reported loss of Rs 20 lakhs for FY 2015-2016 would have been about eight times higher than what was reported. Auditors’ stand of expenses falling ‘due’ but unlikely to be ‘paid’, is no grounds for not treating it as a cost.

• Women Next Loungeries Ltd’s case: This was a listed SME company with 70 percent public shareholding. The key concern areas were: (i) No physical verification of inventory of Rs 21 crore, though it was one-third of the balance sheet size; (ii) over one-half of the sales were made to a related party, but no verification was made about the arm’s length nature of the pricing; (iii) No balance confirmation of Debtors of Rs 40 crore, which was two-thirds of the balance sheet size; similarly Creditors’ balances were also not confirmed.

Clearly, the auditor seems to have failed to exercise normal due diligence in verifying the financial numbers.

Soft factors are not soft after all

In addition to the auditors’ failure in figuring out whether financial numbers are doctored or not, there are several softer behavioural and approach-related issues that NFRA has focussed upon. A few of them are:

• Bartronics India Ltd’s case: The auditor failed to produce audit files in spite of repeated requests. Ignoring show-cause notices from the regulator is an undesirable stance.
• Prabhu Steel Industries Ltd’s case: The disclosures made in the accounting statements were not in accordance with accounting standards. For instance, the company failed to prepare the ‘Consolidated’ Financial Statements though it was stated that there were Associate Companies in existence; non-preparation of Statement of Cash Flows; impairment tests not undertaken based on expected credit loss on certain assets like Trade Receivables, etc.
• Burnpur Cement Ltd’ case: The auditor failed to carry out the ‘going concern’ test in spite of the company declaring losses, having negative net-worth and very high indebtedness. The auditor simply mentioned these under ‘matter of emphasis’ instead of qualifying the report. Basic accounting norms were sacrificed, and not following them is an unacceptable practice.

What is NFRA indicating

The instances cited here will provide you with a glimpse of NFRA’s nature of work being undertaken. Recently, NFRA organized a Webinar focussing on ‘Audit and Corporate Governance’. Along with its top brass, some experts too shared their views. I too participated in the deliberations. Arising out of the comments made by some NFRA members (views expressed were purely personal), I summarise a few of the key views worth taking note of by the NFRA members (views expressed were purely personal), accounting and auditing fraternity:

• Auditing standards espoused from time to time, must be followed by the auditors. This is non-negotiable.
• Two sections of Companies Act need to taken note of:

o Section 143 (9) – ‘every auditor shall comply with auditing standards’;

o Section 143 (10) – the auditing standards of ICAI will be the deemed standards unless otherwise directed by the Central Government.

• Those charged with governance, especially the Audit Committee and the Independent Directors must play an active role in ensuring good governance. A passive role is no longer acceptable.
• Audit documentation is often found weak. Mandatory auditing standards must be supported by appropriate documentation (auditors cannot say that verifications were made, without being able to prove that it was so done).

Last few words

Two words seem to be occupying the mind space of NFRA – ‘fraud’ and ‘auditor’. Undoubtedly, corporate frauds are the biggest economic value destroyers, and auditors are the cornerstone of good corporate governance.

Most auditors are doing a great job, and that is why the edifice of the business world especially in India is galloping. But some recalcitrant auditors are pulling many an effort, down.

The signature of auditors is one of the most powerful. Modern society is now increasingly expecting the auditing community to help make the world of business a lot cleaner and more dependable. The task is not easy, but executing very challenging tasks makes certain professional pursuits worth practising.

About the Author: Robin Banerjee is the Chairman of Nucleon Research Pvt Ltd, a global clinical research company. Earlier, he served as the Managing Director of Caprihans India Ltd. Robin has authored 3 bestselling business nonfiction books: (i) Who Cheats and How; (ii) Who Blunders and How; and (iii) Corporate Frauds: Bigger, Broader, Bolder.

Source: Economic Times (ETCFO.com)