There was an important job to be done and Everybody was sure that Somebody would do it.
Anybody could have done it, but Nobody did it.
Somebody got angry about that because it was Everybody's job.
Everybody thought that Anybody could do it, but Nobody realised that Everybody wouldn't do it.
It ended up that Everybody blamed Somebody when Nobody did what Anybody could have done.
Audit is an exercise that Everybody thinks Somebody did thoroughly.
Yet, Nobody did, what Anybody could have done!
The choice and the appointment of the auditor are essentially steered by the management (promoter) through the audit committee and the board of directors (BoD).
The shareholder approval process is a ritual with little active interest by the external shareholders.
The audit is almost entirely based on interaction with the management team, with the chief financial officer (CFO) or the equivalent being the focal point of settling the issues that surface in the process.
Unless the audit committee is headed by a well-qualified professional, the interaction in the audit committee is limited and sanitised by the management.
The detailed and descriptive, but not easily decipherable, audit report is more a statement of apology of what the process does not achieve, and why no reliance should be placed on it by anyone!
The management has nothing to learn from the audit report as it is largely its own output. The BoD is calmly indifferent to it, unless it becomes the cause of cutting their annual commission!
The institutional shareholders know more about the company and the business climate than the auditors do and care little about it. The rest of the small minority shareholders are bemused for its curiosity value.
Yet, the constituency that often uses the audited numbers as an alibi for its own failure to do independent diligence are the credit rating agencies, the debenture trustees and the lenders who rely on the former for their credit decisions.

The finance minister (FM) has recently exhorted the banks to avoid making risky long-term loans. It is a very profound advice.
One of the reasons the long-term loans turn risky is due to the frauds that go undetected for a long time.
A big part of the loan write-off by the banks and loss to the other creditors could have been avoided if the audit was by a cross-functional team of experts appointed by the banks than by mere accountants appointed under the statute.
The critical purpose of the audit should be to spot the mismanagement of resources.
This is hardly attempted in the current scheme and even explicitly disavowed by the Institute of Chartered Accountants of India (ICAI) as the purpose of audit.
In the light of the observations of the FM on avoiding risky loans that ultimately turn bad, a recent example of the loan settlement done under the Insolvency and Bankruptcy Code (IBC) process is set out in some detail.

Coastal Energen P Ltd, is a 1,200MW coal-based energy plant set up in the south of Tamil Nadu.
Like many infrastructure projects, it suffered a significant overrun in the capital costs, funded by the lenders with no equity infusion.
The capital cost of this project was initially estimated at Rs4,297 crore and later revised to Rs7,870 crore.
The debt default was predestined by the way the banks loosened their purse strings and did not insist on balancing equity infusion.

It is common knowledge that infrastructure projects are padded up, to allow for a decent sum of pocket money for the promoter and for meeting other environment-related expenses to get the approvals.
The 1,200MW project appears a case of having multiple pads like what batsmen had, facing the four fearsome fast bowlers of the West Indies in the 1970s!
The comfort for the banks to go headlong into such lending decisions is the audited balance sheet of the company certified as true and fair.
For the auditor, true and fair is the availability of suitable purchase orders for incurring the extra cost.
Of course, the better auditors may add a key audit matters (KAMs) that they adopted various additional procedures to ensure that the approval process was robust in the company with adequate safeguards for such overruns!
And no audit is complete without obtaining a detailed management representation, instead of performing an independent examination of the evidence.
The report of the Wambach committee on the Wirecard accounting scandal in Germany had recorded how EY went by the management’s oral representation on many shady deals, in the face of reports in FT alluding to a scandal, instead of conducting an independent enquiry or investigation.
The banks had an overall exposure of Rs11,600 crore, principal + overdue interest.
It appears that a one-time settlement (OTS) was proposed in 2019 for a Rs3,100 crore settlement together with a 15% equity stake in the project. The promoters did not go through with this.

The balance sheet as of March 2020 showed the company’s assets were recorded at Rs8,876 crore of which the written-down value (WDV) of the plant was Rs7,176 crore.
However, in the IBC proceedings, the fair value of the asset was certified as Rs3,175.48 crore and the liquidation value was fixed at Rs2,410.33 crore.
A consortium representing Adani Power Ltd became the successful resolution applicant offering a settlement of Rs3,400 crore.
How, in the IBC process, the liquidation and the fair value are so finely arrived at by independent valuers to help the right bidder to net the target, is a subject by itself to uncover!
The table here shows how big the dent was in the recovery for the banks which assure their depositors that all their loans are fully backed by assets!
The other aspect that is never spoken of in the context of IBC’s functioning is the level of losses to the non-financial creditors.

In this case, the amount of Rs4.6 crore recovered by the operational creditors is an abysmal fraction of their dues of around Rs760 crore, though the resolution professional (RP) admitted a lower amount only.
The data on write-offs should consider the loss to operational creditors and government agencies like water, electricity, tax collectors, etc, who get practically nothing in any resolution.
The Adani consortium not only got a prized asset at a huge discount, but made sure of a very significant tax break using an innovative structure to ensure a full capture for the past losses, and with a fresh lease of life for carry forward.
However, the main jackpot to Adani is the existing power purchase agreement (PPA) with TANGEDCO which would have been fixed on the basis of the original capital cost with a fixed internal rate of return (IRR)!
An argument may be made that nothing prevented the banks from getting a forensic audit done when the cost escalation was to be funded rather than accept the audited accounts.
Unfortunately, there is no compulsion to do that and banks just go by the general audit carried out.
As the government is keen for the private sector to make big ticket investments, it is the right time to relook at the audit process.
In respect of companies that have taken bank or public loans exceeding a particular sum, say Rs1,000 crore, the audit appointments should move away from the shareholders to a central administrative agency.
The audit shall be carried out by a multi-disciplinary expert team comprising suitable technicians relevant to the entity’s business.
The reports should be published in the same manner the present audit reports are.
The question may be how would a diverse set of stakeholders like the lenders, tax department, assorted public shareholders and other enforcement agencies arrive at a common framework for an audit?
This may be the least of the problems in implementing this idea, though it would require due thought.
Such intensive audits may not be necessary every year.
The very fact that such audits would take place at some frequency would discipline the management and the BoD to be extra vigilant and be scrupulous in the way the accounting procedures are followed in the preparation of the books.
The chairman of the national financial reporting authority (NFRA) is recently reported to have admonished the ICAI for being not progressive in adopting the international standards for ensuring audit quality.
ICAI can redeem itself by duly conceptualising and initiating the reforms suggested above and helping the government put in place an agency to adopt neutral auditing.
ICAI’s survival and continued relevance may paradoxically be linked to it killing the present form of audit that serves no social purpose. It should put in place another that would not only bark aloud but bite where necessary!
(This is sixth part of a multi-part series)
You may want to previous articles in this series…
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)