INTERNAL AUDIT CONTROL SYSTEM

Internal controls are a system consisting of specific policies and procedures designed to provide management with reasonable assurance that the goals and objectives it believes important to the entity will be met. Why have internal controls? Internal auditing is a profession and activity involved in helping organizations achieve their stated objectives. It does this by using a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. BASIC CONCEPTS OF INTERNAL CONTROL Internal auditing frequently involves measuring compliance with the entity's policies and procedures. However, internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds. Management, not auditors, must establish and maintain the entitys controls Internal controls structure should provide reasonable assurance that financial reports are correctly stated Promote operational efficiency and effectiveness Provide reliable financial information Safeguard assets and records Encourage adherence to prescribed policies Comply with regulatory agencies

No system can be regarded as completely effective Should be applied to manual and computerized systems

VALUE OF INTERNAL CONTROL Transactions are: Valid Property authorized Recorded Properly valued Properly classified Timely Reconciled to subsidiary records

Control environment consist of: Management philosophy and operating style-tone at the top Organization structure-separation of duties & fiscal officer reporting lines Assignment of authority and responsibility Competent, knowledgeable personnel-personnel policies and procedures & training and development Communication and information systems Internal audit function-either in-source or outsource External influences-compliance & external auditors

Designing of control system Identify RISKS in your environment- Mission, Compliance, Transactional, Assets Identify control points Analyze potential EXPOSURES Design system to mitigate RISKS

Internal control procedure

Personnel Proper procedures for authorization Adequate separation of duties Adequate documents and records Physical control over assets and records Independent checks on performances

OTHER ELEMENTS TO REMEMBER Consistency of policy compliance Coordination in a decentralized environment Completeness and relevancy of policies Issue escalation and resolution process Accountability Flow of financial information Linkages between technology, process and organizational structure Alignment of University objectives, risks and controls Early warning systems Training and other HR mechanisms Tools and techniques for monitoring

KEY CONCEPTS TO RETAIN Internal control is a process. It is a means to an end, not an end itself. Internal control is affected by people. It is not just manuals and policies, but the people at all levels of the organization. Internal control can be expected to provide reasonable assurance, not absolute assurance, to an entities management or board.

SATYAM AND AUDIT CONTROL

INTERNAL SYSTEM

You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time-Abraham Lincoln.

Satyam chairman RAMALINGA RAJU managed to disprove the American president and has put some of the biggest fraudsters to shame by fooling the whole IT industry, stakeholders and employees. The unfold has not only tarnished the squeaky clean image of the $60 billion Indian IT services industry but has thrown corporate governance and ethics literally out of the window, potentially impacting the whole industry, stakeholders, global customers and the careers of What started as a failed acquisition bid of Raju family promoted two real estate companies Maytas Properties and Maytas Infra (Maytas is Satyam spelt backwards!) on December 16, took a new turn with Raju's admission of a Rs 7,000 crore fraud on 7 January and ended three days later, with Raju and his brother Rama surrendering to DGP Andhra Pradesh. While the court cases may implicate several accountants, auditors and members of the top management, it has already rocked the foundations of corporate governance laws in India as also shaken up India Inc.

RISE OF A GLOBAL MAJOR

Back in the 1980s a young entrepreneur Ramalinga Raju started Satyam Spinning Mills. A keen observer of global markets, with a mind for new thinking, Raju read the growth potential of the information technology and the role India could play in it.

Without any background in IT but a strong belief that the 'spirit of entrepreneurship' is transferable across any field of endeavour Raju founded Satyam Computer Services on 24 June 1987. From 1987 till the damning revelation on 7 January 2008, the fairy tale, the saga continued alongside the Indian IT growth story - complete with bagging the First Fortune 500 client, Deere & Co in 1991, listing on BSE, an IPO oversubscribed 17 times, later a NYSE listing, global accolades and awards. The most prestigious being the now withdrawn, 'Golden Peacock Global Award for Excellence in Corporate Governance for 2008' from London based World Council For Corporate Governance, awarded as recently as 22 September 2008. And the company boasted contracts with such envious global customers like Microsoft, FIFA, GE, Nissan, Nestle, Applied Materials and so on.

CHINKS IN THE ARMOUR

But there were some indications of a fraud running even at least five years back. Many people who had worked or were invited to work for Satyam left in a short period of time. According to industry sources, a very senior consulting head was once offered a job as a CEO at one of the Satyam's subsidiaries. But the executive refused to join as he was not even being allowed to see the balance sheet of that subsidiary along with Satyam. In another instance, a very senior executive in a finance role quit just within two months of joining Satyam. The executive is now working with a Mumbai based IT company.Says CFO of a top tier Indian IT company, "for competitive purposes when I used to analyse their balance sheet,

large amount of money in current account did not make any sense. Perhaps it was being siphoned off to other businesses." Similarly, in another instance a Kotak analyst had inquired in October, last year from Satyam CFO about the rationale behind keeping $500 million in current account from Satyam, which draws no interest. ETtoo had got a similar response in September, last year. A a senior executive who quit Satyam BPO who said that he had many a times asked Mr Raju to spend the excess cash assets to spend for attractive buyouts for the BPO, like Infosys and Wipro were doing, but it all fell on deaf ears. Obviously Raju went from strength-to-strength revealing terrific quarter-on-quarter performance, often beating street expectations without anyone catching on to any wrongdoing.

AND FINALLY, THE FALL

Things peaked in August of 2008, when many top level officials of Satyam started resigning, rumoured to be on confrontation with Raju's vision for the company. For instance, the entire top team of Satyam BPO had resigned by October. Satyam executive management team also started getting rickety, with the resignations of top level officials like Shailesh Shah, head of strategy.

Inside sources say that many team members had confrontations with Mr Raju on missing attractive buyout propositions despite huge cash in hand. It was only later, that those individuals realised that the cash never existed. On December 16, 2008, around 6:30 pm, two hours post closing of the markets, then Satyam Chairman Raju announced a buyout of 100% stake in Maytas Properties and 51% in Maytas Infra, thus effectively making Satyam, a core real estate company from a core IT company overnight. The total outflow for both the acquisitions was a whopping $1.6 billion comprising of $1.3 billion for the 100% stake in Maytas Properties and $300 million for a 51% stake in Maytas Infra.

The buyout was met with severely negative reactions from the investors and shareholders, with many threatening to sell off entire stake in the company. This prompted a huge list of prospective buyers as share price of Satyam suddenly dropped. It's ADR on NYSE fell almost 54% the same day. Within 24 hours, Satyam made a U-turn. He said, "We have been surprised by the market reaction. In deference to the views expressed by many investors, we have decided to call off these acquisitions." The Rajus had lost Rs 3,400 crore in the day as share prices of Satyam plummeted.

THE FALL

The gameplan behind the takeover of Maytas was to fill the gap of cash reflected in the books but actually non-existent, by taking over his own company, with his sons running the show. It back-fired. Board members Prof. Krishna G Palepu, non-executive director and Vinod K Dham, non-executive & independent director, Prof. Mendu Rammohan Rao, non-executive & independent director resigned from the Satyam board following the adverse public reactions to Raju's decision. The board members alleged that important facts were concealed from the board and thus they were misguided. Next came the confrontation, with the World Bank. On December 23, Satyam was barred from bagging or bidding for contracts with the World Bank for eight years for providing Bank staff with "improper benefits". The shares fell almost 14% to its lowest in four years. Ramalinga Raju then spent his Christmas countering the allegations by World Bank. The company asked World Bank to immediately withdraw those statements and apologise to Satyam, which obviously the Bank never did. Meanwhile, Raju's share in the company fell from 8% to 5% making it an attractive bid target.

HOW THE LID WAS BLOWN?

Post the Maytas fiasco, DSP Merill Lynch was appointed to look into Satyam's books and possibly find it a suitor and soothe the shareholder outcry. On Tuesday, January 6, DSPML is reported to have met Sebi officials and told them about large scale accounting irregularities. It told the regulator that it was uncomfortable in handling the mandate.

It also submitted a letter to Sebi on the same. The night of January 6, was one of the most discomforting nights for Raju and his family. As day broke, at 9.45 am, before the opening of the markets, a letter was faxed to Sebi Chairman, the board of Satyam, BSE and NSE. Rest is history. In the letter Raju, admitted about an inflated (non-existent) cash and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore.

Nasscom went into an immediate damage control due to the disclosures made by its past Chairman. Nasscom President Som Mittal said: "This is a stand-alone case of failure. We expressed shock at the disclosures made by Mr Ramalinga Raju."

Satyam was originally started as Satyam Constructions. In 1987, Ramalinga Raju with his botherin-law DVS Raju, founded Satyam Constructions. It was perhaps here that he inherited the construction and real industry balance sheet skills. Perhaps its Mr Raju's real estate genes that he tried to impregnate inside an IT setup that back fired.

GOVERNMENT ACTS

Concerned about the fate of its 53,000 employees spread across 55 countries, the government took stern steps. PC Gupta, the Minister for Company Affairs, announced sacking of the board and appointment of new directors, to be announced over the next few days.

The former Satyam chairman and his brother have been booked for non-bailable under the Indian Penal Code, which could put them behind bars for years. And by superseding the board, the government has sought to ensure business continuity and that documents are not tampered with. SEBI committee on corporate governance chairman and Infosys chief mentor NR Narayana Murthy says he is shocked and painfully dismayed.

THE WAY FORWARD

With the government now taking over things it will be reassuring for Satyam customers, employees and stakeholders. These is assurance now of business continuity and this could eventually help the beleaguered company find a buyer. In fact, things look bright for a government assisted transaction like a Bear Stearns type of rescue where JP Morgan bought (assisted by the US government) the beleaguered investment bank for as low as $10 a share.

Alternately, post a thorough due diligence by government and auditors, Satyam could be broken up into pieces (BPO business, verticals, service lines et al) and sold to several buyers, like energy giant Enron was. "With the government taking over the board, we are advising our clients to stay put as the cost and time of transition is very large at the moment," says Avinash Vasishtha, CEO of Tholons. There are three options before the government. According to Tholons, the best option is to stabilise Satyam and merge it with an indemnity against any financial liability with a bigger IT company.

However, even as the government would prefer a quick end to the current turmoil, there could be delays due to the sheer magnitude of the mess. Whichever way things go, experts agree that Satyam may not exist as a standalone entity for very long. With government support it will be easier, to begin with get cash to manage the operations of the cash starved company, reassure global clients and stakeholders and eventually find a buyer.

INVESTORS RAISE QUESTIONS OVER PWC SATYAM AUDIT Furious Indian investors are demanding to know how PricewaterhouseCoopers (PwC), one of the world's largest accountancy firms, missed a systematic 1 billion fraud at Satyam, the IT outsourcing giant, for as long as seven years. In contrast, Merrill Lynch, the US bank, became aware of the deception in just ten days. PwC's role in "India's Enron" comes under the spotlight amid allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, accountants and auditors into staying quiet. B. Ramalinga Raju, the former chairman of Satyam, shocked corporate India on Wednesday

when he confessed to inflating the company's profitability, which led to more than 1 billion in fictitious cash and other assets on its books. Investors had been told that a $1 billion cash pile Satyam possessed was, in fact, just $78 million, Mr Raju disclosed in a letter to the board a straightforward falsehood that the company's auditors might have detected had they run a rudimentary check of the group's bank accounts, according to experts. "It's hard to miss $1 billion of cash," Dennis Beresford, a former chairman of the Financial Accounting Standards Board, the US accounting watchdog, said. Satyam's bogus accounts had been audited by Price Waterhouse, the Indian-based auditor, which is a member firm of PricewarterhouseCoooper International, since the financial year 2000-2001. The company's balance sheet as of March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam is based. Merrill Lynch had been retained by Satyam ten days before Mr Raju's confession, to explore merger opportunities for the outsourcing giant, which was already struggling with corporate governance issues. Just hours before Mr Raju admitted to the fraud, Merrill Lynch severed its ties with the company. "In the course of our engagement, we came to understand that there were material accounting irregularities, which prompted our aforesaid decision," a spokesman for Merrill said. PwC said today: "The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. "Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others." Analysts said that the Satyam scandal had underscored the need for urgent reform to India's creaking corporate governance standards. The country, for instance, does not restrict auditors from carrying out consulting work for the companies they audit. Saurabh Mukherjea, of Noble, the London-based investment bank, said: "We have run into listed

companies where the advisory arms of the audit firm earn consultancy fees for help with M&A, new entity structuring and tax minimisation." In most Western countries rules limit such activities, which could trigger conflicts of interest for auditors. Mr Mukherjea suggested that the Satyam fraud should not come as a shock. "Our experiences suggest that manipulative accounting and aggressive promoter practices are more common in India than is generally believed to be the case," he said. "Many firms have become so convinced of their own invincibility that they do not even bother denying irregularities when confronted with the evidence. They simply threaten you." Analysts say that creative accounting techniques, such as recording revenue ahead of time, booking fictitious sales, manipulating expenses and the disbursal of cash to outside companies in which a group's directors have an interest are commonplace in India. Foreign institutional investors are also weary of the influence exerted by India's politicians over the country's regulatory system. PwC's roll in the Satyam scandal will now be probed by the Securities and Exchange Board of India, the markets watchdog, and the Indian government's anti-corruption office. The Institute of Chartered Accountants of India is also investigating and has the power to bar Price Waterhouse from working in the country indefinitely, a spokesman for the body said. Satyam was also listed on the New York Stock Exchange and faces a class action lawsuit in the US.

ROLE OF AUDITORS, IN LIGHT OF SATYAM SCAM Introduction Consequent to a written confession by Satyam Computer Chairman B. Ramalinga Raju, admitting to the recent multi crore scam of misrepresenting facts in the Companys balance sheet to the tune of around Rs. 8000 Crore, has brought the role of auditors and accountants for the company under scrutiny. The role of PricewaterhouseCoopers- the statutory auditors in Indias Enron comes under the spotlight amid allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, accountants and auditors into staying quiet. Given the scandals of the past like Worldcom, Parmalet and Enron, the imminent issue is how

effective and trustworthy Auditors really are. An Auditor, first and foremost has to be a Chartered Accountant under the Chartered Accountants Act, 1949. He is the person appointed to examine the books of account and the accounts of a company registered under the Companies Act, and to report upon them to the companys shareholders. Audit means the examination or assessment of a companys annual accounts, i.e. a balance sheet, profit and loss account and other financial statements as required by law. Under the Companies Act, an auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the companys state of affairs and financial position. To formulate such an opinion, the auditor needs to examine the companys internal accounting system, inspect its assets, test-check of accounting transactions.

DUTIES OF AN AUDITOR The statutory duties of the auditor basically entail the following: 1. Duty to make certain inquiries 2. Duty to make a report to the company on the accounts examined by him 3. Duty to make a statement in terms of the provisions prescribed. The auditor has a duty to inquire into certain matters and seek any information required for the audit, from the company. This could be in relation to security on loans and advances made by the company, any transactions entered into by the company and whether they are prejudicial to the interests of the company, whether personal expenses are recorded and charged to proper accounts, any transaction with respect to sale of shares and whether the position depicted in the books and balance sheet is correct, honest and proper. If there are any suspicious circumstances or unusual transactions like unavailability of original documents, or sudden increase or decrease in shareholdings or debt, employees given the liberty to access unauthorized documents etc., then the auditor is under a clear duty to probe into these transactions and ensure that they are proper and legal. At all times, auditor has to act with care and skill of a professional of reasonable competence. The degree of care and skill required however, varies from case to case.

Auditors Report Under Section 227 of the Companies Act, the auditor is supposed to report to the beneficiaries of the company i.e. the shareholders in the general meeting, about the books and accounts of the company, the balance sheet and profit and loss account on the basis of their assessment. They have to give their opinion on the financial position of the company and also make sure that it has been fairly, truly and honestly depicted. As per Section 227 of the Companies Act, the report should also state1. That the auditor has obtained all information and explanations, which are to the best of his knowledge and belief necessary for his purpose; 2. Whether in his opinion, all the books of accounts and requisite documents necessary for the audit have been furnished by the company; 3. Whether the balance sheet and profit and loss account comply with the books of accounts; and 4. Any observation and comments on the functioning of the company, especially, which may have an adverse effect on the company. He is thus required to report not merely on the balance sheet but on the accounts he examines, and he also has to express his opinion whether the company has properly kept all the books as per law and whether the balance sheet and profit and loss account are in accordance with the accounting standards and procedures prescribed by the ICAI. The report should be complete, concise, clear and unambiguous and the auditor should be careful about the language used, as the readers of the report are all laymen. Auditors opinion can be qualified or unqualified. A qualified opinion is an opinion subject to certain reservations. That means that the auditor is unable to satisfy himself that the accounts present a true and fair view of the companys financial position. As per Section 227(4) of the Companies Act, the nature and reasons of qualification should also be clearly stated, instead of merely stating grounds for suspicion. For the purpose of drawing up the report, the auditor is given the right to inspect and examine the books and accounts, balance sheets and vouchers or any other requisite documents necessary for the purpose of the audit. These documents can be accessed by the auditor at all times, irrespective of where they are kept. The auditor can also ask for any information and explanation from the officers of the company, and the officer would be under a duty to furnish the information and explanation so needed.

Duty to report fraud During the course of the audit, the auditor could come across situations where he discovers that a senior employee is defrauding the company or using unfair practices, then an obligation arises of the auditor to report what he has discovered to the management immediately so that appropriate action can be taken. If the auditor identifies the possible existence of fraud or other irregularities in accounting practices, the auditor should attempt to clarify it or report it. There may be circumstances, where the auditor needs to report to a third party without the consent and knowledge of the management, when he suspects that the management may be involved. The auditor should consider the magnitude of loss that will occur due to the fraud and irregularity and the number of people that will be affected by it or the possibility of recurrence of the fraud if gone unreported. As a measure of recoverable loss, the court noted that no losses would have been incurred from the date of discovery if the auditor had taken some action to blow the whistle.

Auditors duties to third parties The courts have held that if the auditors know or have reason to believe that the accounts so prepared by them will be relied upon by third parties, they are under a duty to ensure that those accounts are carefully prepared and that they dont contain any false information or negligent misstatements and that they reflect a true and fair reflection of the companys financial position. There is no legal principle that a holding company is unable to recover damages for loss in the value of its subsidiary resulting directly from a breach of duty owed to the company itself, as distinct from a duty owed to the subsidiary. With respect to the duty of auditors towards shareholders and investors, in the case of Caparo Industries Plc. vs Dickman4, the plaintiff company, in an attempt to make a bid for the takeover of another company, relied upon the accounts and statements prepared by the auditors of the target company and suffered a loss, due to inaccuracy of the accounts. In an action against the auditors, the court held that the auditor owed a duty to the companys shareholders but not to potential investors. This ruling was affirmed in a number of cases thereafter. But post the ruling of Columbia Coffee & Tea Pty. Ltd vs Churchill 5 the Supreme Court of New South Wales held that a companys auditors do owe a duty of care to potential purchasers, although since in this case, no reliance was placed on the

auditors report, the auditors were not held liable. This has now been overruled but the law now states that under special circumstances, there may arise a direct relationship between a third party and the auditors. In the absence of such circumstances, an auditor is generally not found to owe any duty to the third party unless he or she intended that person to rely on the statement, or if there is an assumption of responsibility.

Duty as to considerable accuracy The auditors function is not just to verify the arithmetical accuracy of the accounts; but that it includes all the particulars required by law and that it presents a correct and honest view of the companys financial standing. Therefore he must examine all the records and books of the company with utmost care and precision.

Detection and Prevention of Fraud The term fraud is defined as: An intentional perversion of the truth, for the purpose of inducing another in reliance upon it, to part with some valuable thing belonging to him, or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury... A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.

Fraud basically falls into the following three categories: Management fraud - when the senior management is involved and they are manipulating the financial statements and misrepresenting the real picture, or theft or improper use of company resources; Employee fraud, which involves non-senior employee theft or improper use of company resources and carrying out of practices and transactions under the table; and

 External fraud, which involves theft or improper use of resources by people who are neither management, nor employees of the firm.

Internal audit staff and external auditors have to perform an essential function of fraud prevention and deterrence as they are up to speed, experienced and trained in the same and can see to it that the loopholes in the system and the risk areas are identified and investigated. Once they are identified, quick action has to be taken to address and rectify them. The internal processes and programs have to be tested at regular intervals to test their effectiveness. In order to do this, the auditor needs to ensure that effective anti fraud programs are in place, which not only prevents fraud but also assists in its detection and cure. This can be done by 1. Observing the modus operandi of financial reporting; 2. Overseeing the internal audit and control system; and 3. Reporting findings to the management. Some of the factors that indicate the existence of fraud are unavailability of original documents, unusual relationships, unauthorized transactions, and unexplained items in the accounts, sudden increase or decrease in trends, employees given liberty to access system and records, disparities in accounts and spur of the moment adjustments in the books. Once the fraud is detected, the auditor can investigate it further by authentication of original documents, impromptu tests and location visits, contacting major customers and suppliers, interviewing the personnel and testing the veracity of computer records. The auditor should then report of this to the director or the management, unless circumstances are such that their involvement is suspected. The possibility of detection is a lot less in such cases. However, then the auditor can either approach a third party or consider legal counsel. The auditor is at all times, required to act with reasonable care and skill, but he is not required to always be on the lookout for fraud or a lie, unless he comes across such information or situation which is unusual and instigates him to act with suspicion of a professional man of reasonable competence. An auditors main function is to assess the financial position of the company and depict the same in the accounts i.e. the balance sheet and profit and loss account. There is no hard and fast rule for defining reasonable skill and care and

that varies from case to case. If there are suspicious and unusual transactions and features in the accounts or other prima facie reasons, reasonable skill and care has to be exercised. An auditor is not to be confined to the mechanics of checking vouchers and making arithmetical computations. He is not to be written off as a professional adder- upper and sub-tractor. His vital task is to take care to see that errors are not made- of omissions, commissions or downright untruths. To perform his duty properly, he must come to it with an inquiring mind- not suspicion or dishonesty.

FORENSIC ACCOUNTING CONSULTANTS

In some situations, the company has to look beyond the independent audit team for expertise in the arena of fraud prevention. In such cases, CPA forensic accounting consultants can provide additional assurance or advanced expertise, since they have special training and experience in fraud prevention, deterrence, investigation, and detection. Forensic accounting is unique in that it combines accounting with investigation. The bloodhounds-as opposed to the watchdogs- the auditors attempt to sniff out fraudulent transactions from the financial records of banks and companies.

LIABILITIES OF AN AUDITOR

The auditor has a fiduciary relationship vis--vis the shareholders of a company, therefore he has a moral obligation to see that ensuring that the statements issued are made with the utmost skill safeguards their interests and care and depict the true and fair state of affairs of the company. Section 233 of the Companies Act imposes a penalty for on the auditors for non- compliance of Sections 227 and 229 with payment of fine if there is wilful negligence and default. The auditor may have to compensate the members or shareholders of the company who have suffered losses attributable to the negligence in performance of the auditors duties. The auditor may be held liable in tort for fraud and if there is negligence in detection of errors that may cause loss to the company. In order to hold the auditor liable for fraud, the following conditions must be satisfied:

1. That the statement signed by the auditor is untrue and false; 2. That he knew it to be untrue either or did not apply reasonable care and skill; 3. That he intended the report to be relied on by others; and 4. That the parties on relying upon the report suffered loss. The Companies Act, 1956 imposes a Criminal liability under Section 628 on any person who makes a false or untrue statement through any document like balance sheet, profit and loss account, return, prospectus, intentionally, thereby causing a loss to the people who rely on such documents. The auditor who knowingly doesnt make a fair and honest report of the companys financial position in any report, certificate, return, prospectus or other documents, and makes false statements therein is liable. The shareholders interests are dependant on the degree of care and skill applied by the auditor to draw up an accurate and honest report o f a companys state of affairs. Therefore, the auditors should employ utmost good faith, care and vigilance in the carrying out of their duties. If there is the slightest bit of suspicion of the legality and integrity of a record or transaction, the auditor is under a duty to investigate and report it, before he certifies it to be true.

FUTURE SCENARIO: THE SATYAM INCIDENT WILL

(a) Require the audit committee to be more active and vigilant;

(b) Increase substantially the coverage and intensity of internal audit and, sometimes, even an investigative audit may be required;

(c) Force the statutory auditors to rely much more on external evidence directly obtained by them; (d) The DCA will have to strengthen the Board with information and enforce its earlier system of tri-annual inspection of listed companies which has been implemented lackadaisically in the last few years;

(e) Encourage the ICAI to strengthen all quality control measures including peer review and develop a system of inspection of auditors as in Canada

(f) Require companies to introduce an effective whistle-blower policy.

Internally, the professional firms have to introduce partners' audit review and partner-rotation programmes; some have done so already. It is not without logic that the entire developed world has, after a great debate, not opted for mandatory rotation of auditors but has opted for rotation of partners instead. The proposal to rotate auditors every three years has to be carefully reviewed. The auditor has to understand the business, its risks, its internal controls etc. Mid-size firms like ours will gain but it will damage the profession if auditors have to shop around for replacement audits every three years.

CONCLUSION The shareholders of a company place very high reliance on the auditors report, which apparently shows the true and fair view of the accounts of a company. The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. But still, Satyam has happened. The role of the UICAI and MCA should now not just be confined to punishing Satyams auditors, but they should also re-examine the present system to strengthen and intensify internal audit system.