For a firm that is still grappling with the challenges arising from its alleged involvement in the Satyam fraud case, PricewaterhouseCoopers (PwC) has been moving fast to repair its image. Apart from bringing in foreign auditors to oversee audit work in India, PwC, which is also the largest accounting and advisory firm, has appointed an independent advisory board to guide it in operations.
In an exclusive interaction with ET, days before he takes over formally as global chairman of PwC, Dennis M Nally shared his views on a wide range of topics from the challenges facing a global auditor to the scope for expanding the role of an auditor and the importance of the Indian market for PwC.
If you go back 7 to 8 years, when the last corporate crisis happened (the Enron/WorldCom episode), auditors were considered to be the villains of the piece. This time, credit rating agencies are being blamed for their failure, while auditors have not received much flak. What is the perception among the auditing community?
You are right. In 2001-02, the environment was totally against audit firms. Then all over the world, we saw significant changes to the auditing profession... in terms of more regulation. We had Sarbanes-Oaxley (the federal law that came as a reaction to the corporate scandals from Enron), Public Company Accounting Overseas Board (PCAOB), among others, and lots of regulations. These changes have been good and financial reporting is much better today than in 2002. Auditors and the accounting profession have to ensure that financial statements are made more relevant. As we move further away from the historical concept and accept fair value and mark-to-market transactions, the role of the auditors has become more important.
There is a cluster of public sector regulators and private quasi regulators such as the auditors, including the Big Four, and rating agencies. The problem was that these firms offered other services. An auditor is not just auditing a firm and (neither is) a rating agency rating an instrument... Where does the accounting profession stand in this debate?
Id like to debate whether in Enron or in Arthur Andersen, the problems were caused by the type of services provided. I think the issue of non-audit services is really an interesting question. If an audit firm is really going to do a high quality audit, we are going to need skill sets and competencies that allow us to do technology issues, or valuation issues or cross-border tax issues. There is a fundamental difference between then and now - all four firms (the Big Four) will definitely acknowledge what happened in the case of Arthur Andersen. There is a lot of difference in, say, the governance structure compared with what existed five-six years ago. Audit committees are much more involved in the approval of non-audit services and there are newer, stronger checks and balances.
Should the supply of non-audit services be self-regulated or should there be government regulation?
Its back to the governance issues, but I believe that if there is a strong and independent board, it will be more knowledgeable and in a position to evaluate what a firm is doing. So, instead of outside regulation, a strong and independent board will be able to evaluate a firms position.
Indian companies have been expanding rapidly and that has brought a whole host of issues mainly related to compliance. How do you ensure that an auditor or an audit firm faces these issues?
It is complex, but the solution starts with training and of having the right kind of methodology in auditing. The solution also goes to show what the internal procedures are, how individuals sign the accounts and what skill sets they have. The key issue is to have a high degree of consistency.
PwC recently decided to bring in auditors from its various international/outside affiliates to run a check on the audit work done in India. Is it to maintain consistent audit standards?
It is based on the whole idea of cross-border expertise, where we take individuals with skill sets in one country and share that expertise in another country. The idea is to make the firm stronger.
What are your plans for India?
China, India and Vietnam are important markets for us, as the growth in such regions is very positive. We have over 6,500 employees in India, and plan to take the number to 10,000 in three to four years. We also plan to add a significant number of jobs from our sourcing strategy.
There is a lot of debate on the going concern concept, given the extreme fluctuations and the sharp erosion in valuations of assets. What are PwCs thoughts on this and on the mark-to-market valuations?
This debate was primarily sparked off by the unavailability of credit. But I now think that with credit beginning to flow, the going concern concept would retain its importance and continue. Financial institutions have used MTM trading for a long time and the credit crisis created some impact. While MTM valuation will continue, there will be more disclosures, as everybody agrees that a true and fair view is better than the historical concept.
Could an audit firm have predicted the collapse of someone as big and with such a wide reach as Lehman Brothers?
Auditors provide opinion on the financial statements given to them by the companys management. Having said that, it is difficult for auditors to give an opinion on the business model of a company. That is not their job. Audit firms will have to ensure that the relevance of financial statements to various stakeholders is maintained. In that context, there is a debate on extending the scope of an auditor significantly.