THE MYTH ABOUT THE BIG FOUR AUDIT FIRMS IN INDIA

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.

NON- SETTLE-MENT BETWEEN FARMERS AND GNIDA: WHAT DOES IT MEAN FOR ALL

It has been over a few months now that the farmers, builders, home buyers and even the Greater Noida Industrial Development Authority are in a flux without any clue as to what’s there in future. While the court has given a deadline of August 12 to find out a solution, the talks between GNIDA and farmers have failed again on August 1. The reason was simple: farmers want higher compensation; and in his discussion with the farmers Rama Raman, CEO, GNIDA, failed to give any assurance in this regard. This actually made me think, what if they fail to arrive to what the court says an amicable solution? In that case, the court will be left with no other option than to give a verdict that has two key points - return the land to the farmers and refund money to the home buyers. But the question remains on whose will this decision go? Who will gain the most?

Well, in order to find out the biggest gainer, we first need to find out the future impact on the three parties who are at stake; namely the farmers, builders and home buyers.

Farmers: Considering the verdict assumed above, the farmers get their land back. But the only problem is that construction work had already started on most part of this land, and thus the fertility of the land is a big question.

Builders: As per this verdict, they will be at a double loss. First they will lose their investment on the land and the construction activities they have carried on so far. Second, they have to pay back to the home buyers, and most probably with interest. This will not only trouble them in funding them their other ongoing projects, but will also obstruct in getting funded by banks or other sources. Home buyer: Well, they may look like the safest lot as they will get back their money with interest. But the problem is that by the time they get back their money (assuming that the process of refund will take three to six months to complete), their affordable home will not remain affordable anymore. The prices of affordable housing around the same region (where these home buyers are likely to move) have already gone up by Rs.1,500 to Rs.2,000 per sq. mtr. Considering such escalation in price and adding up the very fact that builders will soon raise this price to make for their losses at Greater Noida, when the home buyers will book a new affordable house around the area, they will have to shell out at least Rs.10,000 to Rs.15,000 more per sq. mtr. And that will be really costly.

Moreover, with this price hike, the concept of affordable housing in NCR will be over soon. The purpose behind creating NCR was that the necessity to reduce the congestion in Delhi. But with the recent developments, the middle-class population in Delhi, mostly living in rented properties, will not shift out of the main capital region as they see no benefit in terms of cost savings. At the same time, with the NCR outburst and high real estate prices in Delhi, the common man now cannot even dream to own a house in his entire life.

As the scenario suggests, it’s a loss-loss situation for all parties. In fact, it’s a loss for the Indian real estate sector too for the simple fact that all we get to see here is an artificial escalation of home prices, which will definitely add a lot more to the already burgeoning real estate bubble.

Certainly, the farmers deserve a fair price for their land. But, at the same time builders need to carry on for the betterment of thousands of middle-class home buyers and for the industry as a whole. So a more logical way to solve the issue is that in stead of dealing with GNIDA (which actually created the whole mess by its illegal acquisition of the land and then by selling it to the builders) as the neutral party, farmers and builders should talk directly and negotiate to bring an end to this issue once and for all. Else, the issue will keep getting delayed escalating losses for all parties.