The Securities and Exchange Board of India’s proposal that audit firms ramp up disclosure of reasons for quitting auditing assignments has come not a day too soon given the contemptible areas of darkness around audits.
In line with global experience, with some of the biggest auditing firms having oligopolistic control over the audit scene, India too finds itself a repeated victim of collusive auditors. The banking system has been crippled by the financial shenanigans of its borrowers, covered up by smart auditors.
While the reputation of the auditing profession has not recovered with scandal after audit scandal ~ post the Enron shame taking down Arthur Andersen ~ engulfing global auditors, fees may not have been penally impacted. Issues around reputation came to a head in India with the unraveling of the bottomless Infrastructure Leasing & Financial Services (IL&FS) pit.
The latest from this storyboard comprises summons from the Enforcement Directorate to senior executives of Deloitte Haskins and Sells and BSR and Associates through whom KPMG conducts audits in India. Had a whistleblower not informed the Serious Fraud Investigation Office of the auditor knowing about the red-flagged malpractices, no one would have been any wiser and the auditor would have a happier bottomline.
Thus auditors receive phenomenal fees even from “bankrupt” clients with payers scarcely grudging the payee handsome cover-up fees. Lure of lucre prompted the auditor to help the firm elude detection by allegedly creating complex structures, instead of stopping crime on its tracks. The Yes Bank fraud fetched Ernst & Young, a oneyear suspension from bank audits, while the 2018 two-year ban on PwC, following its failure to detect a $1.7 billion Satyam Computer Services fraud, saw corporates worry about auditor replacements but not overly about ethics.
Deloitte and KPMG groups, for instance, audit more than 250 companies, accounting for some 40 per cent of the market capitalization of listed Indian companies. Regrettably, the many smaller Indian audit firms have not been able to combine and put up a rival big enough to take on the Big 4 even though they squabble over turf. The government, perfectly aware of the unholy mess, finds it preferable to go soft on the delinquent auditors who, cynically, hold the keys to global investments. For a government desperate for international funds, support of the Big 4 is considered critical.
There is, besides, the sadly justified belief that the Big 4 are just too big to fail and that corporate moneybags can swing anything. It is, therefore, in the fitness of things that the imbroglio around Anil Ambani’s Reliance Capital, has seen PwC resign as the auditor. Hopefully it will disclose much under the new dispensation and, should the government want, it could use this opportunity to open up the can of worms.
The worry is that not even the National Financial Reporting Authority will come into its own and cleanse the Augean stable, given the big money at play here. Expectations that the profession will-correct itself, under the Institute of Chartered Accountants of India, are being belied.