Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas? As per the “Butterfly effect”, tiny initial changes in big systems could have extremely complex effects. The butterfly effect is most familiar in terms of weather but going by the recent developments, this butterfly metaphor seems to be happening in the economic and business world also. Even the 2019 Economic Survey acknowledges this when it says, “This is a world of butterfly effects and unintended consequences…”. Here’s a case study:
The Butterfly Effect: A Business Case Study
All hell broke loose in India’s accounting circles after the Supreme Court judgement in the IL&FS case. Turning the fundamental tenet of audit upside down, SC has made the detection of fraud a primary objective of the audit. The audit community is in jitters concerning its future. “It’s a bloody mess”, one ICAI member told The Faking Times, speaking on condition of anonymity. Overturning the famous Kingston Cotton Mill judgement, Justice Lolipop observed,
“An auditor is bound to be a detective, and to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a bloodhound and not just a watchdog. He is not justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are dishonest and should not just rely upon their representations. Even if there is nothing calculated to excite suspicion he should probe it to the bottom; he is bound to be extra cautious and careful. He should proceed with the presumption that all businessmen are crooks”
Fraud fear is looming large over India Inc. as it is expected that bloodhounds will be in a position to easily sniff out corporate wrongdoing. This will result in large-scale disclosure of financial irregularities that currently get swiped under ‘true & fair view’ instead of the ‘true & correct view’. Therefore, as an aggrieved third party, India Inc. filed a review petition in the Supreme Court seeking to re-examine the verdict. The petition stated that it is not possible to end business corruption without ending political and official corruption in India. It also claimed that without corruption, it will become increasingly difficult for corporations to fund political parties and to pay hush money to revenue officials or a labour inspector thereby putting Indian democracy in jeopardy.
A delegation of Confederation of Indian Industry (CII) members also met PM Narender Modi requesting to pass an ordinance to overrule the SC judgement. They conveyed to the PM that corruption is in our genes and this genetic predisposition can’t be cured overnight. Moreover, achieving the target of a sustained GDP growth rate of 8% and becoming a USD 5 trillion economy by 2025 simply cannot be achieved without it.
There is a strong correlation between corruption and economic development. Corruption is deemed necessary as it acts as grease for lubricating the otherwise inefficient economy. Moreover, it will strike a death blow to creative accounting, a growing field of research. This, in turn, will adversely impact the demand for professional accountants in the corporate sector creating large-scale unemployment. As PM Modi is known to be an avid reader, the delegation also gifted him a copy of the new holy book, Sapiens: A Brief History of Humankind written by Yuval Noah Harari.
However, the chartered accountants’ apex body ICAI which is already reeling under pressure from various quarters for going soft against erring members is wasting no time. It is soon going to publish a new Auditing Standard for the benefit of its members in discharging the onerous responsibility placed on their shoulders by the apex court. As per the exposure draft released for public opinion, the following are the important provisions of the new Standard on Auditing, Becoming a Bloodhound: Considerations for Audit Engagements under Hostile Environment (SA 920)
Auditing Standard SA 920
Becoming a Bloodhound: Considerations for Audit Engagements under Hostile Environment
Effective from 01-01-2020, every audit work undertaken by a chartered accountant will be deemed to be a forensic audit. Accordingly, an auditor is mandated to approach his work with suspicion and to take an investigative approach to each transaction. As it is expected that this will create a spirit of hostility and mistrust between the auditor and the auditee, therefore, this SA has been framed to help the members discharge their responsibility of unearthing and rooting out corruption from the Indian Inc. While undertaking any audit engagement, the auditor is expected to adhere to the following guidelines:
1. Unlike dogs, humans have a limited number of olfactory receptors in their noses and therefore cannot sniff like dogs. Moreover, as per the theory of evolution, all our senses have dulled over time and can’t be reversed overnight. The Canine Sniff is a tool better than any human investigative tool and has not been utilised to its full potential except by police and government investigative agencies. Therefore, every audit firm should hire a canine to smell the wrongdoings by the directors and staff of corporations. Only the following breeds of dogs having the best scenting ability are allowed: )Blood Hound b.) German Shephard c.) Beagle d.) Labrador.
Further, it is also important to hire a canine fitness professional offering all-around care, grooming, walking, and training of dogs. This will also help auditors escape trial in case negligence is proved by making an alibi that the dog should be put on trial as it failed to provide a timely alert to the auditor. Very soon the institute will come up with a course curriculum for awarding a professional degree of CCA (Canine Chartered Accountant) to dogs who successfully complete the one-year course. Afterwards, it will become easier for audit firms to pass the buck as dogs will be held guilty of professional negligence.
2. As far as possible, audit work should be done at an outside location far from the client’s premises. However, in case it is not feasible then a minimum of two private security guards should accompany each audit personnel while visiting the client premises.
3. For undertaking the audit of listed firms, it is mandatory to empanel at least one private detective agency to keep a 24-hour vigil over the private affairs of Board members.
4. To impart self-defence skills to CA candidates, during the internship, every candidate will be required to undergo one year of Basic Combat Training (BCT) under the supervision of a military veteran.
5. As part of the risk-management, every audit firm has to mandatory take a minimum professional liability cover equivalent to 50% of the average of the last 3 years’ profits of all the auditee companies.
6. The resulting increase in audit fees on account of the increasing complexity of the audit environment has to be recouped from the client. Therefore, the minimum fee structure has been revised upwards. From now onwards, the audit fees shall be linked to both the sales and the PAT. It will be either 5% of the turnover or 20% of the PAT whichever is higher.
Related News:
- The world faces a huge shortage of sniffer dogs due to rising demand from India
- The Big 4 accounting firms deploy Dog Squads
- Rajkumar Hirani ties up with Idionomist for a film to be titled Munna Bhai C.A
- Rahul Gandhi smells ‘Chowkidaar’ in the SC judgement
- The Cabinet met today to discuss the implications of the SC ruling
- The government hikes duty on canine imports
- India to become the first nation to allow genome editing for curing corruption: PM to meet a delegation of scientists to understand ethical concerns over the CRISPR-Cas9 technology
- The apex body ICAI signs an MOU with Facebook to design an AI system for forensic audits.
- Union cabinet proposes a necessary amendment in the law to bar sniffer dogs from the premises of PSUs.
- General insurers jack up the premium of professional liability cover
- The PE ratio of general insurers doubles overnight
- Indices Plunge on SC Verdict: Sensex drops 10,560 points to end at 10-year low
- Foreign Investors exit in droves due to looming fear of recession in India
- India slides back in Doing Business (World Bank) rankings.
{P.S. As per a recent study published in Harvard Medical Journal, those who always maintain a serious demeanour and can’t laugh at the absurdities of life, suffer from a serious imbalance of happiness hormones like endorphins, dopamine and serotonin. So you are requested to closely observe your facial expressions while reading this idiotic piece of writing.}
(Disclaimer: This is a work of fiction and is part of “ The Faking Times” November 2019 edition. Any similarity to actual institutions or events is purely coincidental.)
