In the recent past, the audit profession has been the subject matter of public commentary and scrutiny thanks to the searing probe it is facing.
The increased weightage placed on statutory duties of auditors has exceptionally increased the risks associated with the audit profession. It is safe to say that scrutiny on auditors has substantially increased due to the constitution of the National Financial Reporting Authority under Section 132 of the Companies Act 2013. Now, auditors are looking at possible penalization for failure to detect fraud or non-compliance with statutory provisions. The penalization includes the power to debar the auditor or audit firm from undertaking an audit for up to 10 years. Even Big4s are not spared.
The shift in the spotlight can be clearly noticed in some recent case laws. For instance, in ICAI v. Mukesh Gang, the Hyderabad High Court held the auditors guilty of gross negligence and violation of auditing standards. The level of strictness with which auditors are penalized for such wrongs- is in contrast with decisions in cases such as Union of India v. M.N. Basu where the Calcutta High Court had stated that non-reporting of extending loan without passing a resolution under Section 370 of the Companies Act, 1956, was not due to gross negligence but due to an erroneous interpretation of the law.
The proposition of an auditor being a ‘watchdog and not a bloodhound’ in Re Kingston Cotton Mills is now seeming outdated. In the past, auditors have failed to pay too much heed to nuanced expectations like receiving independent external confirmations. However, with the paradigm shift in the way the profession is being viewed, auditors agree that the risk – rewards relationship is heavily skewed and while the risks of audit have disproportionately increased, the revenue is subpar.
This is driving auditors to become more innovative within the audit practice and use forward-looking and proactive tech enabled audit tools. Technology has started to make inroads in most audit firms, and this directly and positively impacts the quality of each audit. The use of sophisticated technology solutions like practice management, audit confirmation, sampling, and data analytics is fast becoming standard operating practice as firms are embracing the digital-first approach to engagements. Not only are these tools enabling auditors to improve accuracy and analyze anomalies, trends, and areas of risk, but they are also proving to be much more cost effective for auditors.
One such tool that is helping auditors optimize the quality of processes and mitigate potential risks related to audit confirmation is Firmway. Firmway provides web-based SaaS platform that digitize the entire audit confirmation process. In cases like the Satyam fraud case, it was found that auditors’ failure to properly execute third-party confirmation procedures resulted in the fraud going undetected. It was held that the auditor relinquished control of cash confirmations entirely to their client and failed to question the integrity of the confirmation responses they received from the client by following up with the banks.
The entire fraud would have been nipped in the bud if there had been a platform where auditors could independently confirm all balances from third-parties. In Arrangement with The ICAI, Firmway is one such platform that helps auditors automize the independent audit confirmation process in compliance with SA 505. Firmway intends to show a clear picture of the company’s financials and curtail any potential fraud and misinformation. It thus provides auditors and authorities a higher level of assurance and smoothens the overall audit process.
To know more about the Audit Confirmation tool – Click here