On January 13, PricewaterhouseCoopers, the independent auditor of Satyam withdrew its audit reports on financial statements issued by Satyam. Dismayed investors and general public are still debating on how an auditor can withdraw a report that was relied on by investors.
The audit community is feeling let down that a firm of PwC’s stature could not detect the overstatement of revenues and the holes in cash and bank balances. The media has already pronounced the auditor guilty of negligence. These sentiments are understandable. But at the same time we should dispassionately consider what is expected from an independent audit.
Detection of fraud and error is not the principal aim of audit. This principle was laid down as early as in 1986 in the leading case, Re-Kingston Cotton Mills Co. If there remains a deep-laid fraud in the accounts, which in the normal course of examination of accounts may not come to light, it will not be construed as audit failure, provided the auditor was not negligent in carrying out his normal work. An auditor is not a ‘detective’.
The audit community is feeling let down that a firm of PwC’s stature could not detect the overstatement of revenues and the holes in cash and bank balances. The media has already pronounced the auditor guilty of negligence. These sentiments are understandable. But at the same time we should dispassionately consider what is expected from an independent audit.
Detection of fraud and error is not the principal aim of audit. This principle was laid down as early as in 1986 in the leading case, Re-Kingston Cotton Mills Co. If there remains a deep-laid fraud in the accounts, which in the normal course of examination of accounts may not come to light, it will not be construed as audit failure, provided the auditor was not negligent in carrying out his normal work. An auditor is not a ‘detective’.
Read more... on http://www.business-standard.com/india/news/too-early-to-nail-satyam-auditors/00/01/347720/
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