A FARCE CALLED AUDIT

A FARCE CALLED AUDIT

 

When I say audit, I mean audit of a bank. Here I am about to describe how the audit of a branch is carried out. Our branch has a total business of about Rs 57 millions. Advances account for Rs 22 millions spread over 2145 accounts.

 

Audit of the branch commenced on April 15 1993. It was completed by 17^th April 1993. IN JUST THREE DAYS, a firm of chartered accountants certified that the financial statements display a true and fair view of the state of affairs.

 

The boss called out the figures from the balance sheet and the two articled clerks having a copy each ‘SQUARE ROOTED’ the items. I can already visualize you creasing your forehead trying to recall your word power. Well, you see, these auditors have to place a mark against the item they have checked. And to do which they use a mark that very nearly resembles a mathematical sign ‘SQUARE ROOT’. Uncrease your forehead. Let me progress. This way the balance sheet was checked (rather ‘square rooted’).

 

While the balance sheet was being square rooted, another Senior requested for Ret II Part A and began to do ‘you-know-what’. You didn’t get me. I can see you struggling alternating between biting your lower lip and scratching your head. Lemme help you. Only this time. THE SENIOR BEGAN TO SQUARE ROOT RET II PART A. The officer handling the advances department was requested to assist him. For the first few minutes there was total confusion. Because it so happened that either they read out together-each thinking that it was he who had to call-or they kept staring at each other –each thinking hoping that the other would take the lead. For a brief period this ‘collision’ continued. Then they made a deal. Senior would call out the a/c number first and then the officer would read out the balance. Once this was done, the senior simply raced away doing ‘you-know-what’. This time I won’t help you, Pal, you should know. At the end of each page, he would make sure that he had ‘square rooted’ all the items. So careful and systematic. After all they are professionals, aren’t they? It was more to break the monotony than any critical observation that the senior occasionally raised some doubt as to the classification, security value, DICGC cover etc. This was done so far between that one hardly remembered any probing questions. It appeared as if he was content with ‘square rooting’ everything. Oh, yes, I remember one question he posed. Suddenly, he asked the officer about the ‘DICGC COVER’. The officer briefly explained the various provisions of DICGC. To this, the senior countered, “show me the DICGC COVER”.  Well, so much far audit.

 

All this time the two articled clerks kept drumming the calculators verifying the totals of balancing books and seem to have set among themselves some sort of competition as to who would finish the ‘green stuff’ fast. Now, now, my dear environmentalists, don’t worry. I was not referring to the greenery around us. Now I can see a fogged look on your faces. Let me explain. Eight auditors out of ten – for reasons I have never been able to comprehend – use green ink for – yes, of course -‘square rooting’. I suppose I have succeeded in removing the fogged look on your faces. Let me progress.

This way Ret II Part A was checked. Nnno, it was ‘square rooted. Absolutely right, it was ‘square rooted’.

 

Next was Ret II M (suitfiled a/c). Square rooting business continued. Rarely the senior asked for party’s file. Once when he did, he held out a bunch of sheets and enquired if they were “title deeds” of the property. the officer looked as if he was hit by a ten ton brick. The bunch of papers pointed out by the senior was ‘decree copies’!  Well, so much for audit.  

 

The branch has a few tractor loans. The auditors wanted to see the vehicle of a borrower (chosen by them at random). The tractor was brought to the bank. Just the sight of the tractor satisfied them. Well, that is audit for you. A farce. On going through the audit report of our branch, among various observations-mostly ordinary- a couple of them attracted my attention. Let me narrate them.

“It was observed that for the following few accounts periodical stock statements were not obtained by the branch as required”.

Out of the seven accounts listed by them, one account was secured by mortgage of property and the other one by deposits. Now who is to enlighten them that credit facilities secured by mortgage of property and deposits do not require submission of stock statements? Well, that is audit for you.

 

“it was observed that many loans for which decrees have been obtained are yet pending, though decrees are over 2 years old”. They have listed some 10 accounts. For all these accounts, EPs were filed. Well, that is audit for you. A farce. An absolute farce.

 

Let us get down to business. Why is audit necessary for banks? What is it that is expected to be discovered by these auditors that our own internal inspectors do not? Here again, not all the branches of a bank are audited. The financial statements certified by the branch managers of these unaudited branches are accepted. Why are some of the branches exempted? What are the criteria to decide that a branch be audited or not? Is it that only those branches which possess business level beyond a certain limit require audit? What purpose does audit serve with the kind of audit that we have just seen and will – in all probability – see in future unless something is done? Of course, it is statutory for every bank to get its accounts audited by a practicing chartered accountant. Does the Government expect / hope that an outsider has a better chance of stumbling on to the skeletons – if any – of the bank and further hope it to be brought to light which might not otherwise? In which case, before empanelling Chartered Accountants, they must be trained. They must be educated about the various banking practices. They must be provided with adequate materials to equip themselves. They must be trained about the areas where misdeeds could take place and also as to how to detect them. For e.g., in the incident narrated above, the auditor was satisfied by merely seeing the tractor. Chassis number was not verified. Nor did they verify the Registration Number. For all we know it could be anybody’s vehicle. If the sight of the vehicle was sufficient proof, then why call for the inspection of the tractor?

 

Now we have a new concept: ‘income recognition and asset classification’. With the bankers themselves having difficulty in comprehending and implementing the instructions of the RBI, how can Chartered Accountants be relied upon to certify the financial statements? All that the Auditor does is to certify on the basis of the registers/information supplied to him by the bank. In which case what is the necessity for a PRACTISING CHARTERED ACCOUNTANT to certify bank’s state of affairs? Each bank has recruited Chartered Accountants. They are treated as special officers. Instead of hiring the services of an outsider banks can very well utilize their own employees who are equally qualified to certify the state of affairs. In fact audit by our own employees will be more meaningful for they know the systems and procedures well. Also banks will save considerable amount of audit fees which is reaching astronomical figures. On comparison audit by external team of Chartered Accountants looks unorganized with inadequate knowledge of bank transactions.

 

We appear to be more concerned to ‘just meet the STATUTORY REQUIREMENT’. Little does it matter to ensure quality of audit. Little does it matter if a few Articled Clerks – whose credentials are not known – carry out the audit. Little does it matter if the qualified Chartered Accountant prepares the audit report on the basis of what his Articled Clerks have “observed” during audit. This is how we “MEET THE STATUTORY REQUIREMENT”. What have these Auditors in defense? “Auditor is not a bloodhound”. An auditor is only expected to verify whether or not the accounts display a true and fair view on the basis of the information supplied to him”. If a few test checks are the basis on which they certify the state of affairs of a bank account and if these few test checks are carried out in a manner that defies description, banks would do well to force an amendment to this requirement.

 

Audit by itself is fine. But audit for the sake of audit – which appears to be what is happening in majority of cases - is all the more reason for abolishing it. Or make it sharp.