While the existing Indian Companies Act needs an overhauling on many accounts, one big area of concern is its provisions related to auditors of the companies. While auditors should be used more efficiently and diligently to put a check on the companies, due to the lack of adequate legal barriers, especially on the penalty and punishment front, over the past few years auditors have constantly failed to act as the real whistle blowers.
Going by market share, the Big Four global audit firms – Ernst & Young (E&Y), PricewaterhouseCoopers, KPMG and Deloitte – have grown tremendously in India in recent times. Reason, India Inc. feels that their association with one of the Big Four will provide them a clear image in front of the investors. So much so that many a time I have noticed companies changing their auditor and getting one of the Big Four on the board right before public issues. But the question remains, does hiring these ‘foreign branded’ firms actually help in image building? More importantly, do they really bring out all facts better than the Indian audit firms, or is this a utopian urban legend? Well, going by their track record globally, raised eyebrows are obvious; more so after their startling admissions in front of the House of Lords economic affairs committee in November last year. The irresponsibility was spot on when one of the Big Four clarified that they assumed it to be perfectly alright to portray a better picture in front of investors about their banking clients’ solvency after the government entered into discussions on possibility of a bailout. If that was not enough, a report by COSO (the US body that revolutionised the understanding of corporate reporting) points out that 79% of companies found to be engaged in frauds were being audited by the Big Four between 1998-2007. The same COSO report also indicates that 26% of the companies engaged in fraud had changed auditors during the period, as compared to just 12% of those who were not into fraud.
Cut to the Indian scenario, they have not fared anything extraordinary to keep their image better. While PwC was nearly banned for its lapses in the case of Satyam (had the PwC ban happened, it would have been the third for PwC after being banned in Russia and Japan; it’s the third mess up for the firm after DSQ Software and Global Trust Bank), very few had actually noticed that the biggest of Big Four in India, E&Y, was the auditor of Ramalinga Raju’s family firms, Maytas Properties and Maytas Infrastructure. Not that mere association with a questionable company should throw an audit firm in poor light. But if the questionable company’s financial skullduggery could have been caught much earlier by the audit firm – and it visibly chose not to – that is what is pulling the image of these firms down. For that matter, there have been instances in both global and domestic arenas, which vouch for the fact that hiring the Big Four firms does not necessarily work in favour of the regulatory bodies. In fact, in the post SOX era, while CFOs are forcing audit firms to do more for less fees, audit firms – and not just the Big Four – are focussing more on their consulting businesses rather than concentrating on diligent audit work.
However, the most surprising fact about their operations in India is that two of the Big Four (E&Y and KPMG) are not even registered with the Institute of Chartered Accountants of India. This simply means, technically they are not eligible to conduct audit of Indian companies. But still, they are here and operate through tie-ups with Indian firms. While E&Y has a tie up with S. R. Batliboi & Associates for audit works, KPMG has tied up with Bharat S. Routh & Associates to manage the show. For that matter, how many have enquired about the connection between PricewaterhouseCoopers and Coopers & Lybrand Pvt Ltd? I ask, is one company marketing its services but the cheques being cut in the other company’s name to avoid scrutiny? The fault does not lie primarily with these firms, but with the government or even, I should say, with ICAI. If the ICAI or the government plans to ensure that Andersen-like Enron cases are not encouraged, then the first step would be to ensure that audit firms do not indulge into consulting and other paid research based activities, whether directly or indirectly. And that there is no overlap of marketing functions and project functions – where a foreign name is peddled to get the audit contract and the cheque is cut in the name of the local partner by the client. For whatever it’s worth, at least a consulting firm like McKinsey & Co. sticks to what it claims and does not concurrently take up auditing activities.
Thus, before the Big Four take things for granted in India, apart from stricter norms for auditors in the newCompanies Bill, regulators must also see to the fact that the audit firms must be registered in India (and not operate by tie ups with Indian audit firms) at the very first instance, abided by Indian rules and not take up additional work. Till that time, they must be forced to disclose their various business arrangements through public notices. If the Big Four are here, they should act like watchdogs, not just voluntary puppets in the hands of the companies.
Going by market share, the Big Four global audit firms – Ernst & Young (E&Y), PricewaterhouseCoopers, KPMG and Deloitte – have grown tremendously in India in recent times. Reason, India Inc. feels that their association with one of the Big Four will provide them a clear image in front of the investors. So much so that many a time I have noticed companies changing their auditor and getting one of the Big Four on the board right before public issues. But the question remains, does hiring these ‘foreign branded’ firms actually help in image building? More importantly, do they really bring out all facts better than the Indian audit firms, or is this a utopian urban legend? Well, going by their track record globally, raised eyebrows are obvious; more so after their startling admissions in front of the House of Lords economic affairs committee in November last year. The irresponsibility was spot on when one of the Big Four clarified that they assumed it to be perfectly alright to portray a better picture in front of investors about their banking clients’ solvency after the government entered into discussions on possibility of a bailout. If that was not enough, a report by COSO (the US body that revolutionised the understanding of corporate reporting) points out that 79% of companies found to be engaged in frauds were being audited by the Big Four between 1998-2007. The same COSO report also indicates that 26% of the companies engaged in fraud had changed auditors during the period, as compared to just 12% of those who were not into fraud.
Cut to the Indian scenario, they have not fared anything extraordinary to keep their image better. While PwC was nearly banned for its lapses in the case of Satyam (had the PwC ban happened, it would have been the third for PwC after being banned in Russia and Japan; it’s the third mess up for the firm after DSQ Software and Global Trust Bank), very few had actually noticed that the biggest of Big Four in India, E&Y, was the auditor of Ramalinga Raju’s family firms, Maytas Properties and Maytas Infrastructure. Not that mere association with a questionable company should throw an audit firm in poor light. But if the questionable company’s financial skullduggery could have been caught much earlier by the audit firm – and it visibly chose not to – that is what is pulling the image of these firms down. For that matter, there have been instances in both global and domestic arenas, which vouch for the fact that hiring the Big Four firms does not necessarily work in favour of the regulatory bodies. In fact, in the post SOX era, while CFOs are forcing audit firms to do more for less fees, audit firms – and not just the Big Four – are focussing more on their consulting businesses rather than concentrating on diligent audit work.
However, the most surprising fact about their operations in India is that two of the Big Four (E&Y and KPMG) are not even registered with the Institute of Chartered Accountants of India. This simply means, technically they are not eligible to conduct audit of Indian companies. But still, they are here and operate through tie-ups with Indian firms. While E&Y has a tie up with S. R. Batliboi & Associates for audit works, KPMG has tied up with Bharat S. Routh & Associates to manage the show. For that matter, how many have enquired about the connection between PricewaterhouseCoopers and Coopers & Lybrand Pvt Ltd? I ask, is one company marketing its services but the cheques being cut in the other company’s name to avoid scrutiny? The fault does not lie primarily with these firms, but with the government or even, I should say, with ICAI. If the ICAI or the government plans to ensure that Andersen-like Enron cases are not encouraged, then the first step would be to ensure that audit firms do not indulge into consulting and other paid research based activities, whether directly or indirectly. And that there is no overlap of marketing functions and project functions – where a foreign name is peddled to get the audit contract and the cheque is cut in the name of the local partner by the client. For whatever it’s worth, at least a consulting firm like McKinsey & Co. sticks to what it claims and does not concurrently take up auditing activities.
Thus, before the Big Four take things for granted in India, apart from stricter norms for auditors in the newCompanies Bill, regulators must also see to the fact that the audit firms must be registered in India (and not operate by tie ups with Indian audit firms) at the very first instance, abided by Indian rules and not take up additional work. Till that time, they must be forced to disclose their various business arrangements through public notices. If the Big Four are here, they should act like watchdogs, not just voluntary puppets in the hands of the companies.
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