At what stage should a company get into the process of auditing?
Financial discipline should be there from day one. If it is a company, in any case the audit has to be conducted right from the day one.
One cannot avoid it because it is the requirement of the Companies Act. Whether it is partnership firm, proprietorship or any other firm, it depends upon the entrepreneur that at what stage he/she wants to go for audit. Audit is mandatory if the turnover exceeds Rs 40 lakh. I fully agree that audit may not be required if your turnover is so small that it is lesser than Rs 40 lakh. Now with all the provisions coming in, income of below Rs 40 lakh, if you declare the specified percentage of margin of profit, you need not go for audit. Only if you don't show the income at that particular specified percentage, in that case you are required to go in for audit.
I think it is perfectly justified. Rs 40 lakhs and above in any case you cannot avoid and below Rs 40 lakhs it might be little costly so far as the entrepreneur is concerned. The moment your turnover starts touching Rs 3-5 crore in the case of the proprietor, I think even the internal audit should be considered. He may go in for tax audit. But so far as the internal audit is concerned, he should try to plug the loopholes.
The entire objective of the internal audit should be to identify the area of leakages that can be plugged. Whether it is the leakage of the revenue, inventory or purchases. And more importantly, you need to control your statutory compliances. If you are not statutory compliant, in that case anything can go wrong tomorrow. Penalties and fine could be far more severe.
Often internal audit is not welcomed and employees react negatively to it. So how can an entrepreneur ensure that the best interests of the organization are maintained?
It is for the entrepreneur to make sure that it has to be done. In the Companies Act, it remains statutory. Audit should be treated as something that brings value addition. I think an entrepreneur has to convince his staff that internal audit is not here to find their mistakes. It is there to make sure that the system functions. The moment you are able to give that level of comfort to the employees, I think the internal auditor will be welcomed.
Can auditor be an employee of the company or does it have to be someone from outside the company?
This is a very debatable issue. After the Satyam issue, government is seriously contemplating whether internal audit should be outsourced. The moment you have the internal audit department in-house, probably some kind of independence is definitely lost. If you are trying to report against a person, who might be your superior, might be writing confidential report at some stage of the period, you never know because if your job is transferable from one department to another which happens in many government undertaking for that matter, in that case a person will find it very difficult to write something against that gentleman. To my mind, it is preferable that it should be outsourced though it is highly debatable.
What exactly is good corporate governance?
Every company or enterprise has the governance. It is the matter of good governance or mis-governance..
To my mind, governance would mean that the audit committee (that has been laid down in the Companies Act now) it is not essential that you should have an audit committee only when some law or regulator requires it. There should be some mechanisms by way of which you should have some interaction with the internal or statutory auditors or both of them at the same time. This would ensure that the statutory auditor knows where the internal auditor is working, what are his areas of concern and if at all he finds that if he can give some input to the internal auditor and internal auditor can take it from there. And statutory auditor also knows the extent and depth of the checking done.
Governance means creating value for all the stakeholders at the end of the day. It ensures least expensive implementation of the various systems. It also ensures at the same time that there is enough safeguard for the assets of the organization both in terms of their recording and also in terms of verification, the existence thereof. And also at the same time, governance must ensure that liabilities are really accounted for and there is nothing hidden. After all, whatever disclosures have to take place, whatever reporting has to take place, there should be transparency. There can be cases which are going against the income tax department, or other parties, or other parties have filed against the company. Now there has to be transparency. You may say that you do not expect the liabilities to come on you, but that is a different matter. But at least there should be transparency, so that anyone who reads the financial statement that goes to the banks from which you are borrowing the funds etc. They also should be aware that what is happening in the company for that matter.
Are there differences in governance norms for a large listed company and a small start-up?
The difference is bound to be. It is in the kind of controls you are going to have. You cannot have controls which are costlier compared to the gains you are going to make. Whereas in the case of bigger companies you have quarterly audit committee meetings and rather one has been arguing that why only quarterly audit meetings as they are for the purpose of results. There should be another quarterly meeting to discuss other issues. Whereas in the case of smaller organizations, these can be on 4, 5, or 6 months. However, it depends. It should not be very costly. But one thing is very clear, that there should be interaction between management, auditor and the staff. The staff should be made accountable.
What should an entrepreneur keep an eye on to know what is happening in his business?
Accounting is a matter of common sense. For example, if I want to get my home white washed and I have entered into contract with a gentleman. At the time of the payment then I will look at whether the agreed work has been completed or not. As an auditor if I have the same inclination then I will be able to do that.
More importantly, any entrepreneur must ensure that expenditure is incurred only when it is required. The moment you start showing off, you are bound to fail somewhere or the other. At every level, you must try to be cost effective, one must ensure that whatever assets are required must be duly recorded and verified periodically. Period may vary from scale of business. A big business require to get its fixed assets recorded and verified only once in three years but in case of small enterprises they must be verified every year as there are not too many fixed assets.
Accounting in smaller firms should not be very complicated. One should not be generating paper after paper without any consequences. One has to ensure that any transactions that take place should be properly recorded and any person authenticating that transaction must ensure that transaction was for the purpose of the business.
If the company is doing something wrong, then what's the way?
It is not necessary that all companies that are doing well are doing healthy things. There could be some practices which are unhealthy and there is a need to blow whistle on that.
I think every institution like ICAI, SEBI, IRDA must ensure that if a whistle is blown at an appropriate time to draw the attention of the people that what is happening in the company, which is more good for the society at large. It may add to the wealth of the promoters and shareholders but it is no good from the ethical angle. Some kind of protection should be given.
And considering the fact that whistle blowing is not happening in India, what do you think should be included in provisions?
Even in the case of Satyam, whistle was blown. But it was ignored. NR Narayana Murthy report and SEBI did talk of whistle blowing but it was more of the recommendatory rather than mandatory. I think SEBI will have to do something to make it mandatory now. One can create absolute immunity against someone who has blown the whistle so that he cannot be terminated. I think the auditor should also be treated as a whistle blower. Removal of inconvenient auditors should be made virtually impossible. And if you are able to do that, then I think lot many problems will go out.
What defines good audit?
If it is internal audit then it should be definitely in terms of letter of engagement. It should not deviate from there. And if the internal auditor comes across anything which he thinks is fraudulent activity, he should forewarn the management and he must provide the information. The purpose of the audit is not to blame someone but to take remedial action, give suggestions and so on.
So far as statutory audit is concerned, I think the basic purpose is to express the opinion with regard to financial statement and there the auditor will make sure under all circumstances that all assets that are required to be recorded are recorded and do exist also. And, so far as the liabilities are concerned there again all liabilities must be recorded under all circumstances. All financial statements must comply with the various accounting standards which are relevant today.
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