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Auditors told to take fraud to watchdogs

New Delhi, Nov. 10: The Institute of Chartered Accountants of India (ICAI) is drawing up a set of rules which asks auditors to inform regulators of any discrepancy in statements encountered by them.

The draft rules—actually a revised statement of the Standard Auditing Practices (SAP) 4 dealing with fraud and error—have already been circulated among members. The draft rules are being called ‘auditor’s responsibility to consider fraud and error in an audit of financial statement’.

Apart from informing the regulatory authorities, the draft rules says the auditor should also consider if there is a need to report to the person who made the audit appointment. The new draft comes in the wake of several cases where auditors have been at loggerheads with the company they were auditing over what the former perceived as attempts to hide facts, and instances where they failed to take note of problems subsequently discovered during investigations by Sebi and the RBI.

Asking the auditor to take a note of the legal and professional responsibilities applicable in the circumstances, it says that he should consider the possibility of withdrawing from the engagement where he comes across fraud or suspects one.

“The suggestion to report a fraud or a suspected fraud to the regulator is a new provision which empowers auditors to bring the wrong-doers to book,” N. D. Gupta, a chartered accountant and former ICAI president said.

However, Gupta feels if the auditors are themselves hand-in-glove with the management in window dressing accounts, as in the case of several US corporates and audit firms, then it could be a different story. But the new rule will at least allow auditors to bring frauds to the notice of regulators as part of their duty, he said.

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