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    When tectonic plates of India Inc shook because of audit firms & independent directors

    Synopsis

    Financial irregularities was far and few in India’s economic history over the past decade.

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    By Puneet Agarwal

    An earthquake is caused when the rocks in its crust – geologically known as tectonic plates – move, causing damage to a large portion of land and structures constructed thereon. India Inc is going through a similar shakeup due to a sudden movement in a critical tectonic plate i.e. corporate governance and audit firms, the movement of which is causing considerable damage to the economy.

    Occurrence of financial irregularities was far and few in India’s economic history over the past decade. Unfortunately, it has become more frequent; from large listed companies to big financial institutions, none seems immune to this.

    The frequent surfacing of such financial irregularities and the increase in their magnitude have become a serious concern for markets and investors alike. The magnitude in some recent financial irregularities have been large, causing ripple effects, with even small businesses in every corner of the country bearing the brunt of it due to a liquidity squeeze and major demand slowdown. Sectors like housing, automobile – which indicate the state of economy – are going through critical times.

    Reacting to these irregularities, the government through various regulators like RBI, MCA, SEBI and NFRA have initiated actions against company managements, directors and auditors. While it is extremely important to take concrete steps to fix responsibility, it is also crucial to understand the reasons behind such incidence.

    Are there any shortcomings in the existing legal framework governing independent directors and auditors? If yes, they need to be fixed with the involvement of all stakeholders. It is high time that we as a matured economy with a fairly robust legal framework, evaluated how truly independent are our auditors and independent directors? And what are the safeguards available to them, so that they can perform their duties well? Are auditors paid enough to gather the domain knowledge required be it in technology /forensic /valuation /others? Do the firms auditing large companies have the required infrastructure to enable them to perform a good audit? Is the process of auditor selection by company managements and their approval by shareholders robust enough? And then, there are more.

    In the last decade, the government has brought in stringent laws which are steps in the right direction. However, more often, these laws do not differentiate between large and small entities.

    There are two consequences of this: the cost of compliance increases for everyone and the seriousness with which these laws ought to be complied with get diluted as most of the times the government does not have enough bandwidth to evaluate compliance.

    Accordingly, the government may consider upgrading legal frameworks with respect to independent directors and auditors with a focus for entities where the stake for the economy is very high. Probably, this would help curb significant irregularities.

    Like in other academic fields, India produces world-class chartered accountants and auditors working for many large global companies in senior positions. With the right legal framework outlining responsibilities and safeguards, the government can be rest assured that chartered accountants and auditors would deliver what is truly expected of them.

    After few minutes of shakeup, tectonic plates do find a new stable position in the crust and the quake stops. It would be worthwhile to wait and see when corporate governance standards of company managements and audit firms will find their new positions and lend the stability that the economy needs.

    (Puneet Agarwal is Associate Partner/ Audit, MSKA & Associates, at BDO India. Views are his own)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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