Emerging Realms of Reporting – Aligning Profession for Future
Challenging Environment & The Stakeholders’ Ecosystem
With the advent of a digital era and technological evolution, business practices are undergoing a paradigm shift. The pandemic situation that engulfed the globe for the last two years has changed the manner in which businesses are run. The physical world has been significantly subsumed by a virtually operating world.
Besides, there have been instances of corporate frauds surfacing in the past which exposed lack of credibility of the financial statements. Beginning with the Satyam computers case, followed by a few other scams, including Nirav Modi’s case associated with Punjab National Bank, and the case of IL&FS group, the accountability of auditor has been subject matter of scrutiny. This has enhanced the expectation gap of the stakeholders.
The Multi-Tiered Stakeholder Ecosystem
The stakeholders’ ecosystem comprises of the Shareholders, Audit Committee and the Board of Directors, Lenders, Regulators, Customers, Investors, Creditors and Employees. At the macro level, even the public should be perceived as a stakeholder.
There is an imminent need to continue to reinforce credibility in financial reporting in order to rebuild public confidence and continue to bestow trust of stakeholders among the stakeholders on the independence, integrity and competence of the profession.
Quality of Audit & Expanded Regulatory Accountability
“Audit quality is about delivering an appropriate professional opinion in an independent and reliable manner duly supported by adequate audit evidence and objective judgements.”
Corporate failures can lead to class action suits by shareholders and audit failure can attract disciplinary proceedings on the auditor. Audit quality oversight is administered through the Peer Review mechanism of ICAI and Quality Review process of SEBI. ICAI and NFRA exercise their respective jurisdictions on monitoring the audit quality and consequential actions triggered by lapses captured.
Statutory Amendment: Firm Liability for Professional Negligence
Earlier, only the signing audit partner was liable for action through disciplinary proceedings but now, with the amendment in the Chartered Accountant Act, even the firm of which the member is/was a partner can also be proceeded with and made liable in the matter of professional negligence.
Changes in Audit Reporting: Standards & Regulatory Shifts
There has been a significant shift in the content and components of the auditor’s report in the case of companies in general and more so in the case of listed entities. These have been triggered by amendments in the Companies Act, more particularly in Schedule III, changes in SEBI regulations, especially as part of LODR and on the basis of enhanced reporting requirements in CARO 2020. The reporting requirements and the corresponding responsibility of the auditor has undoubtedly grown multifold.
Applicable to audit of financial statements for periods beginning on or after April 1, 2018. The standard requires combining the introductory para and opinion para in the audit report for reporting under the caption ‘Opinion’ at the beginning of the report. Not only basis of opinion needs to be reported but a statement of independence and ethical requirements should be included. Emphasis of Matter (EoM) is another component of the audit report. Additional matters that get reported are assessment of ‘going concern’ and management responsibility for oversight of the financial reporting process.
Reporting on “Key Audit Matters”, introduced through SA 701, offers additional information to users of the financial statements to enable them to understand those matters which, in the professional judgement of the auditor, were of most significance in the audit for the relevant period. Key audit matters are directly related to areas of significant management judgment in preparing the financial statements. Besides, these are significant from among the matters communicated by the auditors with those charged with governance.
Yet another reporting requirement that needs special mention is introduced by SA 720 (Revised) wherein Auditor is required to report on material inconsistency of any information, both financial or non-financial included in the annual report, with the financial statements.
Further in CARO 2020 there is a reporting requirement in the context of trade receivables and inventory statements submitted to the Banks by the auditee. Auditor must report on whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets. Further, whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company should also be verified and reported. If it is not in agreement, then details must be furnished as part of the report.
Emerging Audit Landscape: Technology as Supplement, Not Substitute
With the emergence of technological disruption occurring in the way in which businesses operate, an auditor needs to re-orient the manner in which audit is carried out. Businesses are greatly influenced by Internet of Things (IoT), Robotic Process Automation (RPA), Blockchain Technology, Cognitive Computing and Advanced Analytics.
Due to automation in all spheres evolving on a faster pace, a question on whether audit as a function would survive is asked. Any amount of automation, deployment of tools and software cannot substitute an auditor or audit function. These can supplement and support in the carrying out the audit function.
“No machine, process or system can replace an auditor because the experience-based knowledge, ability to exercise professional skepticism and the capability to arrive at the most appropriate professional judgement during the course of audit is vested only with an Auditor.”
The Auditor, no doubt, should evolve as a tech savvy professional and is expected to deploy appropriate tools including software so as to effectively discharge his responsibility in the digital environment. An auditor can improve upon the quality of audit, efficiency of audit, cost of execution of audit and expeditious delivery of audit services through technological devices and gadgets. Data Analytics plays a critical role in this endeavor.
Technological Frontiers in Audit Execution
- Robotic technology: Automating confirmation processes.
- Drones: Physical inventory and asset verification across expansive sites.
- Big Data & Data Mining: Extracting transaction trends and uncovering hidden correlations.
- Machine Learning: Intelligent pattern matching and anomaly detection.
- Outlier Focus & Predictive Analytics: Adopting a predictive approach focusing on outliers in data analytics to throw meaningful findings during an audit.
Robotic Process Automation (RPA) & Blockchain Technology
Robotic Process Automation (RPA) in Practice & Auditing RPA
As part of the ‘Fourth Industrial Revolution’, Industry 4.0, automation enabled by advanced technologies like machine learning, artificial intelligence and robotic process automation (RPA) have crept into business operations. RPA is a software program which, by means of easy programming language and recorders, imitates human execution of applications which are generally repetitive in nature.
RPA has the ability to improve accuracy, manage controls, enhance efficiency and achieve cost reduction by avoiding execution of repetitive monotonous tasks by humans. It has the ability to improve customer experience besides upgrading skills of personnel. RPA can make a difference in many business segments, more especially in HR management, customer services delivery, finance and accounting (handling customer order management, procurement and sourcing, billing management, records to report function, invoice processing and accounts receivable).
An Audit firm can, in turn, use RPA to automate their process in order to deliver client services in an expeditious, efficient and error free manner. RPA can be effectively used for client reminder mailers, MIS reporting, tax filing related works and GST compliance and reconciliation.
RPA automation in businesses provides opportunities to render services on automation, digitization of operations, and to audit the Robotic Process Automation itself. In order to effectively carry out audit of RPA, an auditor must understand the governance process of RPA. Auditor must review the system blueprint, RPA transaction log and the system of exceptional handling log. An auditor would do well to perform testing of edit, validation check, error check configured in RPA and examine if the results are consistent by re-performing certain calculations and transactions.
Blockchain Technology: Transforming Financial Recording & Audit Verification
Blockchain technology is evolving and is impactful among business entities and professional firms. Instead of recording or storing transactions in a centralized system, this technology enables recording and storage of transactions in a decentralized network on a real-time basis in a secured and efficient manner. Just as the internet revolutionized information dissemination, Blockchain is expected to revolutionize the recording of transactions and smart contracts in replicated ledger using cryptography with the consensus of all parties supported by business logic.
In Blockchain, it will not be easy to change historical records and therefore reliability and authenticity is ensured. Blockchain technology brings with it a few distinct advantages such as efficiency, security and privacy to transactions, transparency to enable real-time view and reinforces governance and trust through the validation of the transaction by all parties concerned.
Blockchain technology can improve the efficiency and effectiveness of audit methodology and financial reporting service delivery. When a client organization uses Blockchain technology, the auditor can use more automation, data analytics and machine learning capabilities for the purpose of audit. Verification of audit evidence in the nature of transaction supporting documentation such as purchase orders, invoices, agreements and other contracts originating the transactions, encrypted and stored in Blockchain, can be accessed and examined by the auditor.
Real-Time Verification Without External Confirmation: The verification of such documents can be on real-time basis and as these cannot be tampered with, the authenticity gets validated without any need for external confirmation. This would also improve the pace of execution of audit and the process of financial reporting.
As Blockchain further evolves and is resorted to by more business entities and corporates, there would be multiple opportunities for the profession in this field. The profession can contribute in establishing new financial services infrastructure and processes in blockchain innovation landscape. There will be room for CA firms to do cost benefit analysis for each of the clients wanting to join Blockchain and provide suitable advisory services. ICAI or the member firms can take lead in crafting necessary regulations governing Blockchain and the standards to be followed by all players concerned.
Triple Bottomline Reporting & The ESG Paradigm
The world is concerned about global warming and depletion of resources. Countries and companies must evaluate their sustainability through proper mechanism. The buzzword in this regard in the current global scenario is ESG meaning Environmental, Social and Governance practices.
Environmental concerns and prescriptions intended to preserve the planet and mitigate climate change.
Quality of life influenced by securing basic needs, sustenance, and holistic CSR traversing boundaries to achieve social equity.
Best practices followed to ensure economic viability and ensure profits within an ethical and legal framework.
The order of sequencing in terms of significance is Planet, People and Profit. Globally, sustainability reporting is assuming significance. Listed entities are already preparing and disclosing sustainability reports based on internationally accepted reporting frameworks such as GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and TCFD (Taskforce on Climate-related Financial Disclosures).
SEBI Mandate: From BRR to BRSR
In India, SEBI has mandated top 1000 companies (by market capitalization) to present Business Responsibility and Sustainability Reporting (BRSR) with effect from financial year 2022-23. However, all companies are encouraged to be early adopters of the BRSR voluntarily. What was hitherto BRR has transformed into BRSR as ESG-driven sustainability is the need of the hour.
The BRSR is an initiative towards ensuring that investors have access to standardized disclosures on ESG parameters. Access to relevant and comparable information will enable investors to make better investment decisions. Higher standards of ESG practices and disclosures will attract increased and sustained flow of capital and investment.
So far, the profession has been empowered to report on the financial statements. However, CAs should familiarize with the concept of Triple Bottomline Reporting which covers environmental, social and financial segments. Unlike financial performance, where measurement for reporting is relatively easier, measurement of performance on environmental and social segments could be challenging. Every such challenge must be perceived as an exciting opportunity by the profession and an auditor would do well to gear up and get empowered in this arena of practice.
Sunrise Services: Diversifying Beyond Compliance into Consultancy Verticals
The profession needs to embrace technology in every facet of functioning and that is bound to bring about accuracy, quality, speed, scaling and cost optimization. There are many sunrise services for which the profession must gear up and adapt to stay relevant:
- Digital Transformation & Business Support Services: Guiding client organisations through process automation and digital architecture.
- Virtual CFO Retainership for MSMEs: Huge opportunities in the MSME segment who may not be able to hire a full-time CFO, providing steady, non-seasonal retainership revenue.
- New Consultancy Verticals: Moving beyond seasonal compliance practice into year-round, high-reward advisory spheres.
- Investment Advisory & Wealth Management: Sourcing business funding options, architecting family arrangements, and succession planning for High Net-Worth Individuals (HNIs).
- Insolvency & Bankruptcy Code (IBC): Acting as Resolution Professionals (RPs), liquidators, and process advisors.
- Forensic Accounting & Systems Audits: Expanding specialization in Forensic Accounting and Investigation, Internal Financial Controls (IFC) audit, Risk-based Audit, and Systems Audit on account of escalating corporate frauds and cybercrimes.
Conclusion: Sustaining the Profession of the Future
A profession like ours owes it to the society to possess the courage of conviction to perform the role as an auditor in the best interest of the stakeholders in order to establish unblemished track record for the posterity to inherit.
“We must not forget that the reputation and goodwill of the profession would be better sustained not by the brilliance of a few but the competence of many and ethics of all the members governed by ICAI.”
Let us be proud of our profession and continue to contribute in all the conventional and emerging spheres with a view to effectively align the profession with the future. If this is ensured, then we need not worry about the future of our profession and instead, our profession will be recognized as the profession of the future.
“No other profession can claim of having as proximate a role and relevant interconnection as ours with the economic development of our country. Let us reinvent the significance of our role in partnering, participating and partaking in the task of building a credible economy in our incredible India.”