Subbarao cautions CAs against ‘Enronisation’

Duvvuri Subbarao on Friday called chartered accountants “the conscience-keepers of the business world,” but stopped just short of recommending stricter regulation of the profession.

“The conduct of Enron, Parmalat etc under the very nose of auditors has raised question about the effectiveness of soft regulation. The profession has to find a way of remedying this if it wants to prevent the imposition of an external regulator,” the Reserve Bank governor said, speaking at the conference of the Western India Regional Council of the Institute of Chartered Accountants of India (ICAI).

Subbarao questioned accountants providing auditing as well as consultancy services, as in the case of Arthur Andersen, which provided accounting services to Enron.

“Andersen did not discover that Enron was publishing incorrect financial statements leading to the term ‘Enronisation of financial statements’,” he said.

The profession has shied away from its responsibility in relation to prevention and early detection of frauds, the RBI governor said, warning that other agencies could displace auditors if chartered accountants were not willing to provide such services, depriving them of a potentially expanding opportunity.

It was possible to reduce the frequency with which public sector banks (PSBs) are audited by using technologies such as core banking and centralised record keeping, he said.

“Currently, the cost of audit of PSBs is significantly higher than the cost of audit of comparable private sector banks. However, the institute has been resisting this because it would mean a reduction in work for its members.”

The RBI governor also drew attention to differences in identification of non-performing assets (NPAs) by the supervisory inspection conducted by the RBI and certified auditors. “In the Reserve Bank’s view, in certain cases, the statutory auditors have underestimated the extent of NPAs and the required provisioning. Since RBI, as the supervisor of the banking system, relies and leverages on the work done by auditors, the profession should effectively address this issue,” he said.

The value systems followed by auditors came up for questioning too. Citing the accounting fraud at Satyam Computer Services, where nearly $1 billion was hidden from the company’s board, its senior managers and the auditors for several years, Subbarao said the erosion of values in public domain was a huge concern.

“With so much accounting misconduct in big corporations, stakeholders wonder why books are not being reviewed on the default assumption that there could be fraud afoot,” he said.
He said the central bank had advised all bankers to set up an audit committee of the board of directors. The chief executive officer of a bank is kept out of such a committee to keep it independent, though the executive director is allowed in to offer insider perspective.

Subbarao, however, asked the accountants for their views on allowing the ED on board as even that may compromise the independence of the committee.

The institute said later that it was open to suggestions.

“Though he raised a few issues in his speech, overall the governor was very positive. The institute is not resisting external regulation,” said Shriniwas Joshi, chairman 2011-12, Western India Regional Council of ICAI.