Can you prevent Cancer by doing good Audits?

The cancer I’m referring to is not related to the human body but that arising from their minds that kill companies and other stakeholders. It is said that Prevention is better than Cure. Annual health checks will sometimes help in the early detection of life threatening diseases and therefore, make early treatment. In that sense an annual statutory audit is a preventive mechanism which should deter people with good sense from misdeeds. BUT, no matter how well designed a governance system and audits are in a company they will not fully prevent greedy, dishonest people from putting their personal interests ahead of the interests of the companies they manage.

Therefore, the regulators should address Frauds and Errors in separate ways. As Frauds are intentional misstatements the perpetrator should be severely dealt with and should be prevented from doing the same at another company. But, Errors may be unintentional and they should be provided an opportunity to rectify same and learn from such failures.

If both are treated the same way, the cost of accounting and audit failures will become immense. It also causes the markets to be skeptical about the auditors and the companies. The cost of litigation against auditors will make auditors approach audits in a negative way of trying to cover any negative impact on the auditor rather than trying to add value to the governance process.

The weakest link in addressing the issues of financial reporting and audit process can be the corporate governance systems. Therefore, regulators need to strengthen the weakest link before trying to increase rules of accounting and auditing. Because, no amount of rules will stop the ‘greed in Wall Street’ or the ‘dishonest from the Main Street.

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About surenraj

“Views expressed are my own”
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