Categories
Governance

Outsource internal audit for greater objectivity

That’s the recommendation from the Institute of Chartered Accountants of India (ICAI), as reported by The India Express:

“In the high-powered committee report on Satyam scam, we have proposed that internal audit should be outsourced and not be in house so that there is more independence. If the auditor is from the organisation, it is as good as being an employee of the organisation and the chances of remaining unbiased decline. Market regulator Sebi through clause 49 and the corporate affairs ministry through the Companies Law should make it mandatory that the internal auditor should be from outside the organisation,” ICAI president Amarjit Chopra told The Indian Express.

I can’t really argue with the logic, but the feasibility of the idea is fair game. The logistics of putting this into place is giving me a headache, and it does seem like an overreaction to a single instance of fraud.

The voice of reason comes from the director of KPMG in India:

“More important [than outsourcing] is the communication between head the of internal audit and CEO or chairman of audit committee. The success depends more on how freely and directly the internal auditor can discuss the shortcomings in a firm with the CEO of audit committee.”

Boards should be ensuring that the lines of communication between the Chief Audit Executive and the Audit Committee are direct and communications frequent and frank. That applies even if IA is outsourced as well.

I blogged a while ago about the Satyam scandal.

Categories
Governance

Internal audit at Satyam

New charges in the Satyam scandal were laid by India’s Central Bureau of Investigation, for “creating fake invoices to inflate revenues by US$94 million and forging company board resolutions to obtain unauthorised loans worth US$265 million” according to this story in Accountancy Age.

This comes after charges were laid on November 21 against the former Head of Internal Audit, VS Prabhakar Gupta, for the company, for “willful suppression of auditing irregularities.”

A lot of coverage in the blogs (primarily Dennis’ and Francine’s) thus far has focused on the role the external auditor PricewaterhouseCoopers played in the fraud, but Internal Audit arguably should’ve been better able to root out the fraud due to its closer familiarity with business processes.

It’s difficult to detect fraud in the best of circumstances, but when the charges involve suppression of irregularities discovered by internal audit, questions will be raised (and arrests made).

DNA (Daily News & Analysis), an Indian English language newspaper, provided additional detail on the arrest of the former Head of IA:

While the spokesman refused to divulge any further information about Gupta, sources in the agency claimed that the auditor had helped in falsifying accounts including inflating the overseas employees pay bill.

On top of this, the Internal Audit department received the Recognition of Commitment from the Institute of Internal Auditors in 2005, which according to the IIA was “available to all internal audit activities that submitted an application fee and met specific criteria in the areas of quality, outreach and professionalism, based on a point system.” The program was discontinued in 2006.

On the occasion, the now former Head of IA had this to say:

We are extremely happy with the recognition that our Internal Audit team has received on an international platform. Satyam is one of only 26 internal audit departments worldwide receiving this award in 2005 and it reinforces our commitment to meet the international standards in the concepts and approaches to audit function contributing to better corporate governance.

Satyam is now commonly referred to as India’s Enron.

Categories
Profession

Economist claims accountant obsolescence

An esteemed Princeton economist has predicted that accountants, lawyers and other highly educated and highly paid workers in the developed world will be made obsolete in the near future by lower cost alternatives in the developing world.

From the best accountants and lawyers to the smartest derivatives traders to teachers and lecturers, many of today’s most prestigious jobs could, thanks to globalization and improved communications technology, just as easily be done more cheaply in places such as India and China.

I’m skeptical, and not just because I’m on his extinction list.

Some occupations are safe, of course. Investment bankers, who have to take out their clients and sweet-talk them are more likely to survive than derivatives traders, who could as easily be elsewhere. Clearly, for example, most of the health profession will still have to remain in situ.

There’s why. If you’re just sitting at a desk crunching numbers, you’re already replaceable. It’s the soft skills like being a good communicator that separates the accountants with job security from the ones who could be half way around the world. How is it that investment bankers are the only ones who are safe due to this reason? Why is the economist ignoring this aspect of professionals’ jobs? What about culture as well? Is being a good advisor really learnable?