The auditors should be independent members with suitable accounting and financial expertise, to appraise the policies underlying the financial reports and to assess their validity. Auditors should ask pertinent questions to clearly understand every transaction, allegation or investigation that has happened. An audit aims to draw out the essence and truth from every answer and helps to examine the controls and processes, employed by the company, in any complex transaction that may be out of the normal process of controls.
The requirement of an annual audit prompts companies to establish an effective compliance programme, which will have anti-fraud controls, to detect fraud, and proper investigation conducted, if fraud is detected. An audit is like a tool that ensures that financial reports would be accurately created and updated, internal control system would be in place and proper reporting and investigation of improper actions would be made.
Most corporate fraud cases have originated at the highest managerial level. The multi-billion dollar cases of fraud involving WorldCom, Enron and Tyco International, were all results of the fraudulent activities of the respective chief executives of the companies. Tyco International's CEO, Dennis Kozlowski, was charged with misappropriating 400 million USD of company money on an extravagant lifestyle and personal expenditure. Similarly, the cofounder and CEO of telecom giant WorldCom, Bernie Ebbers, got convicted for a fraud of 11 billion USD, in 2005. Kenneth Lay, CEO of Enron, was charged with a corporate fraud that ultimately resulted in the collapse of the company.
However, in spite of strict laws that have been instituted to prevent huge losses to shareholders, employees and investors, corporate fraud is still alive. The Sarbanes-Oxley Act of 2002 and other measures that resulted from major corporate fraud cases has made it mandatory for companies to have strict internal controls and has also established a federal board that will oversee the work of the auditors. The act also requires the top executives of a company to sign the financial statements, thus making them personally responsible, in case discrepancies were detected later on.
One of the major corporate fraud incidents to have rocked the world in recent years was that of Satyam Computers. On January 7, 2008, the fourth largest software company that had headed India's IT boom, collapsed with Mr. Ramalinga Raju, the Chairman, conceding that he had tampered with the company accounts. Mr. Raju accepted that he alone was responsible for the fraud, estimated to be about 80,000 million INR. The cash and bank balance of the company existed only on paper.
Now comes the important question about the role of the auditors. In this case, PricewaterhouseCoopers, the international firm of auditors, was the auditors for Satyam Computers Services Limited. A fraud of such an extent cannot be possible without the knowledge of PwC. The books of account was forged, by none other than then company chairman, and endorsed by the auditing firm. By all accounts, PwC had to certify these forged account