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Asish K Bhattacharyya: Is multiplicity of audit bad?

Asish K Bhattacharyya / December 24, 2012, 0:17 IST

E-mail: asish.bhattacharyya@gmail.com Affiliations: Professor and Head of the School of Corporate Governance and Public Policy at the Indian Institute of Corporate Affairs; Advisor (Advanced Studies), the Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited

Audit is not a welcome activity to the auditee. This is so because no one wants scrutiny of activities. Quite naturally when a new type of audit is added, managers grumble. Another reason for considering audit as a wasteful activity is that it is difficult to measure the benefits accurately while counting of costs is relatively easy. Let us examine audit of financial statements (in short, financial audit), internal audit and cost audit. Financial audit is an age-old practice. Companies have learned to live with it. Most companies started appointing internal auditors just to comply with the Manufacturing and Other Companies (Auditors Report) Order 1988 (popularly known as MAOCARO), which is now replaced by the Companies (Auditors Report) Order 2003 (CARO).The order required the finance audit to report on whether the company has an internal audit commensurate with its size and nature of business. Only recently companies have started appreciating the value of internal audit. Cost audit is also in place for quite a long time. However, in the year 2011, the government has made the cost audit more pervasive and more regular than before. Companies view cost audit as an additional burden. The three audits have different objectives but they are complementary in nature. Financial aims at enhancing the degree of confidence of intended users of financial statements. The auditor is legally accountable to shareholders and morally to all the stakeholders. Thus, financial audit is a value-added activity from the perspectives of investors and other stakeholders. Credibility of financial information reduces the cost of capital because the perceived risk of investment in the company gets reduced. Quality financial audit enhances the quality of financial information, which leads to appropriate valuation of securities in the capital market and enhances investors confidence. This in turn attracts capital to the corporate sector and improves capital market efficiency. This is the reason why both regulators and the profession endeavour to protect the independence of the auditor and improve the audit quality. An efficient and effective internal audit ensures that the exposure of assets to risks is within the risk appetite decided by the board and protects the assets from undesirable use, waste and theft. It ensures that the internal control system is adequate and operating effectively. It acts as an internal consultant to the management. In a way it acts as the ears and eyes of the board of directors, particularly of independent directors and enhances the effectiveness of the board.

Consequently, it enhances the quality of corporate governance. It adds value at the firm level as well as the macro level. This is the reason why the Companies Bill 2011 empowers the government to prescribe appointment of the internal auditor for certain classes of companies to be decided by the government. The scope of internal audit is much wider than the financial audit. The management decides the scope of internal audit and has the opportunity to avoid duplication between financial audit and internal audit. A financial auditor relies on the work of the internal audit. They are complementary in nature. Firms make money by producing and/or selling goods and services at a cost that is lower than the price at which they can sell the same. Therefore, managers have an interest in installing an adequate and effective cost accounting system. On this assumption, managers argue that there is no need for cost audit. But reality is not which should logically happen. Many companies do not adopt the best management accounting practices. Managers often do not focus on cost management when the going is good. They take cost cutting as a project when companys performance in the product/service market declines sharply. At that time, in absence of a good cost accounting system they get bewildered and get misled by unsystematic and inaccurate cost and revenue information. Improvement in the use of resources should be a continuous process. Customers today look for cheaper and better products and services. The starting point for introducing a continuous cost improvement culture is to establish a cost accounting system that will provide correct information on the product/service cost and revenue and the cost dynamics. Cost audit brings out the weaknesses in the cost accounting system and draws attention to wastes and thus, improves the competitiveness of the business. Thus, cost audit is complementary to the internal audit. Cost audit aims to improve the competitiveness of Indian companies and the economic productivity of the country. Therefore, cost audit adds value both at the firm level and the macro level. Let us not crib for the multiplicity of audit because they are complementary in nature. Let all stakeholders work together to improve the audit quality.