SOnia

The questions you have raised were doing the rounds for a very long time. The auditors are to give an opinion on the state of affairs of a company – the Balance Sheet as well as the results of operations – Profit and Loss. They give their opinion as to the “True and Fair view” of he state of affairs at a specified date and the profit or loss for a particular period, made by the company. Earlier, the auditors were to report as “True and Correct view” instead of “True and Fair view”. Several cases went to the courts for the determination of the diligence of the auditors. One such case was the Royal Mail Steam Packet Company’s Case. As a result of which, the Companies Act of England was amended in 1948 to require the auditor to state inter alia whether the statements of account are true and fair. The implications of the substitution of “true and fair” need to be understood. There has been a shift of emphasis from arithmetical accuracy to the question of reliability to the financial statements. A statement may be reliable even though there are some errors or even frauds, provided they are not so big as to vitiate the picture. The word “correct” was somewhat misplaced as the accounting largely consists of estimates. So it all depends on the terms of appointment of the auditors and objectives of the function of auditing – the primary objective being the auditor’s duty to report to the owners whether the balance sheet gives a true and fair view of the Company’s state of affairs and the profit and loss account gives a correct figure of profit of loss for the financial year; and the secondary objective or the incidental objective, incidental to the satisfaction of the main objective, being detection and prevention of frauds and detection and prevention of errors.

The duties of the Statutory Auditors have all been well defined in the corporate legislation governing the audit of corporates. With the developments that are taking place in the commercial and technological worlds, the perpetration of frauds also has taken up the new dimensions in right earnest. So, we could find occurrences of such frauds even with the tight regulations that govern the running of corporates and so are the SOX and other requirements.

The objectives of Internal Audit are quite different from those of the Statutory Auditors. In the present conditions, the emphasis is more on the risk evaluation and governance aspects of a company. The combined ‘Governance, Risk and Compliance’ exercise takes a very effective initiative for the prevention of any unexpected situation in the working of a company. These aspects are all pervasive and the management must ensure that all these aspects are the responsibility of everyone in the company. The Internal Auditors ensure that these norms are effectively followed. Besides, the traditional ‘Internal Control’ aspect would ensure that the occurrence of fraud is prevented or detected early.

The final reminder for the common man is that there has to be matching developments in control regime in line with the technological innovations since the fraudsters are much faster in adapting the ‘technology’ for their purposes. There is an old movie song in one of the southern states of India that sings, if the culprits do not correct themselves, it is not possible to eradicate theft and fraud!

Good luck!

Thanks for the compliment and you have given an excellent analogy. Agree with you completely.

Sonia

If a premeditated murder takes place, one cannot blame police why he failed to prevent murder. all he can do only to find out who did the murder and how?. However if the same police is assigned to a person to protect and he fails to protect, then he can be blamed. Similarly my view is that fraud is committed by persons who goes all out not to make it visible. Only the Fraud examiner can find out who did it and how and then to introduce control to prevent it. At the time of giving assignment, nobody says that Auditor is responsible if fraud is not traced. He is given an assignment only to give opinion that the accounts present true and fair view. Please note it is only an auditor’s opinon and not an authentic declaration. only if at the time of assigning the job it is demanded that the auditor is responsible if fraud is not deducted and he agrees to take up with this clause he can be blamed.

Absolutely right. The term – reasonable assurance will have to be redefined if auditors have the responsibility to detect frauds.

Sonia

Sonia