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.

Table of Contents

 Introduction
 What is corporate governance
 What is auditing
o Types of auditing
 Internal auditing
 External auditing
 Tax audits
 Corporate audit
 Relationship between auditing and corporate governance
 Objectives and scope of auditing
 Qualifications and disqualifications of an auditor
 Responsibilities of an auditor
o Presenting an audit report
o Reporting fraud
o The audit report of a government firm
o Liability to pay damages
o Branch audit
o Auditing standards
o Winding up
 Roles of an auditor in corporate governance
o Protection of stakeholders’ interests
o Increasing accountability
o Crisis management
o Reduction of risk factors
o Maintaining relationships with regulators
 Role of SEBI in auditing and corporate governance in India
o Audit processes
o Terms of Reference (ToR)
o Guidelines for audit reports
 Audit committee
o Composition of the audit committee
o Meetings to be held by the audit committee
o Power of the audit committee
 Under Companies Act
 Under SEBI guidelines
o Roles and objectives of the audit committee
 Under Companies Act
 Under SEBI guidelines
 Auditor’s responsibilities in the event of fraud detection
o The Enron scandal
o The Satyam scam
 Conclusion
 References

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.

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;

5. a person or corporation that has a commercial link with the company,

its subsidiary, or its holding or associate company, whether directly or
indirectly;
6. a person whose family is a director or works for the firm as a director
or senior management employee;
7. 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;
8. 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,
9. 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
 https://blog.ipleaders.in/role-of-auditor-under-new-companies-act-
2013/
 https://bcubeanalytics.com/blog/post/role-of-auditing-in-corporate-
governance#:~:text=Corporate%20Governance%20Audit%20is
%20a,the%20interests%20of%20all%20stakeholders.
 https://blog.ipleaders.in/internal-audit-v-external-audit-comparative-
study/#:~:text=Internal%20auditing%20is%20restricted%20to,the
%20organisation%20and%20ensure%20fairness.
 https://www.icsi.edu/media/portals/0/AUDIT%20AND
%20AUDITORS.pdf
 https://corporatefinanceinstitute.com/resources/accounting/what-is-
an-audit/
  https://www.theiia.org/globalassets/documents/resources/internal-
auditings-role-in-corporate-governance-may-2018/internal-auditings-
role-in-corporate-governance.pdf
 https://acadpubl.eu/hub/2018-120-5/1/20.pdf

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 Auditing

 Corporate Governance

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