India’s ministry of corporate affairs (MCA) must be complimented. Not for creating the illusion that it is taking swift action against errant auditors, especially in the case of IL&FS Financial Services (IFIN), but for smartly obfuscating the real issues and camouflaging its own complicity in the financial mess that is unravelling slowly.
The little noise that it is making now – which will also fade eventually as happened in the case of the 2009 Satyam scandal – is only to divert attention from its own failing in preventing some big multinational firms from blatantly violating various regulations.
Initially, it was reported that the MCA had sought a five year ban on Deloitte Haskins and Sells and BSR & Co.( part of KPMG network). This was on the back of a report of the Serious Fraud Investigation Office (SFIO), an arm of MCA, which alleged that the auditors colluded with the management to conceal information about ever-greening of bad loans, diversion of funds, falsifying accounts, etc.
Initial indications from MCA suggested that all network firms of the erring auditors would be banned for five years to act as a strong deterrent.
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The ministry now appears to be back-pedalling, in part at least. Recent reports suggest that the ban may not affect all their network entities or even their lead partners. If this is indeed the case, then the whole exercise would be a waste of taxpayer money.
Generally-speaking, auditors are partners in more than one firm. Even otherwise, there is nothing to stop the errant audit partners from migrating to another firm or from starting start a fresh firm within a day. All business can then be diverted to the other or new firms. Banning only a particular firm is largely meaningless.
Main issue swept under the carpet
The fundamental issue that no one is talking about is that extant provisions of the Chartered Accountants Act, 1949 (CA Act) do not permit foreign partnership firms to engage in auditing.
How then are there so many audit firms are operating as “affiliates” or “network firms” of multinational accounting firms (MAFs)? Several allegations have been made over the last three decades against some allegedly clandestine operations but regulators have chosen to ignore them.
An elementary pre-requisite for enhancing ease of doing business is clarity on laws.
If foreign equity and management control is indeed allowed in auditing firms, then why are so many audit firms including the likes of S.B. Billimoria & Co, A.F. Ferguson & Co., Dalal & Shah, C.C. Choksi & Co., etc. forced to operate as “affiliates” or “network firms” of the Big Four? Why aren’t foreign audit firms allowed to hold an equity stake in their Indian affiliates if there is no such prohibition?This appears to be extremely unfair to the Big Four.
The only hitch: extant regulations do not permit even indirect equity or management control of Indian audit firms by persons not resident in India. However, this prohibition has been flouted by some in the past, with the Institute of Chartered Accountants of India (ICAI) and MCA often making very little fuss.
How then are there so many audit firms are operating as “affiliates” or “network firms” of multinational accounting firms? Photo: Pixabay
CA Act
One unambiguous and uncomfortable legislation that comes in the way of the Big Four operations in India is the Chartered Accountants Act, 1949 (CA Act). The CA Act was meant to regulate, in public interest, the profession of chartered accountants by the ICAI. Section 25 of the CA Act prohibits any company, whether incorporated in India or elsewhere, to practice as chartered accountants.
Another stumbling block is Section 29 of the CA Act which governs reciprocity. Since Indians are not allowed to practice as auditors in countries like UK, USA, France, Germany, Netherlands, Italy, Hong Kong, Singapore, Spain, Mauritius etc. etc., no subject of any such country is entitled to become a member of the ICAI or practice the profession of accountancy in India.
Moreover, pursuant to provisions of Section 2, 4 and 7 of the CA Act, only persons who are registered with the Institute qualify as members who are competent to practice the profession of Chartered Accountancy in India.
FEMA Regulations
Another stumbling block is the extant Foreign Exchange Management Act regulations. No person resident outside India can make any investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India without prior RBI approval.
In simple terms, what the above legislations mean is this: No foreign resident nor any company (Indian or foreign) can practice as chartered accountants or invest in any audit partnership firm in India.
This raises interesting questions regarding the current ‘affiliate’ arrangement that the Big Four practice in India. For instance, why would they allow their brand to be used, and exposed to potential liability, by Indian audit firms without being able to exercise adequate management control?
Management control is certainly lacking, at least in spirit, due to the above-mentioned prohibitions on investment. Does this hodge-podge of a situation provide incentives for secretive arrangements?
Extant laws, irrespective of whether they are good, bad or outdated, must be respected. The settled position in law is that what is prohibited directly is certainly not allowed to be done indirectly. If the law is bad or out dated, nothing prevents the government from having a relook. But till any amendment takes place, the sanctity of the existing law must be respected in letter and spirit.
Blame games continue
In the aftermath of the Satyam scam, a high-powered expert group constituted by the ICAI had submitted a report dated July 29, 2011 which highlighted various violations of the CA Act by multinational accounting firms. Several meetings have reported to have taken place since then between ICAI and MCA, but with no concrete outcome.
Both ICAI and MCA have historically shifted responsibility from one to the other over taking action against multinational accounting firms. After all, who wants to kill the goose that lays the golden egg?
There are small hints that the MCA has now gone one step further. It has indirectly pointed a finger at the alleged indifference of the Reserve Bank of India (RBI) on IFIN for not meeting the basic criteria on the CRAR (Capital-to-risky Asset ratio) and NOF (Net owned Funds) fronts.
Little wonder then that many audit firms have continued to flout the system for several decades and are even now getting away with it. The corporate affairs ministry is now forced to make some noise now because of the humongous proportions of IFIN scam and to deflect attention from its own failure to implement the law.
Worried or not?
In the meanwhile, what is India’s finance ministry doing? Deloitte’s global CEO, Punit Renjen, is reported to have met top North Block officials in early June 2019 to dissuade them from imposing a ban. He also reportedly cautioned our big babus of the negative impact that the ban could have on financial markets, inflow of foreign direct investment and so on.
It is unclear what locus standi he had to represent the Indian affiliates of his international network, given that they have no equity control in them. If he did it by virtue of the network’s management and operational control, then he was taking a big risk.
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One accounting scam in the US, the Enron scandal, was enough to eliminate Arthur Andersen worldwide.
However, in India the Big Four are assured that notwithstanding the multiple scams that they have been alleged to be involved in, it will be business as usual, if not better.
India Inc’s biggest accounting scam, the Satyam Scandal, came to light in January 2009. The SFIO had in April 2009 submitted a report that pointed towards the falsification of accounts and concluded that two PriceWaterhouse auditors were complicit in the fraud. The Supreme Court had fixed July 31, 2011 as the deadline for completing the trial. The special CBI court finally gave its verdict on April 9, 2015, almost 6 years after the fraud came to light. It handed out seven-year jail terms to Raju and nine other accused including the two PriceWaterhouse partners.
Satyam founder B. Ramalinga Raju. Photo: Reuters
Barely a month later, a metropolitan sessions court in Hyderabad granted bail to Satyam Computers founder B. Ramalinga Raju and nine others and suspended their seven-year rigorous imprisonment.
Since then, no one including the MCA, has deemed it fit to challenge the order of the session court. Surprisingly, neither have those convicted by the Special CBI court have moved the higher courts to have their names cleared.
In short, no one seems to be interested in taking things to their logical conclusion.
It took SEBI more than seven years to ban network firms of Price Waterhouse and order disgorgement of wrongful gains of some Rs 13 crore. This amount, which may appear to be big, is actually a pittance when compared to the estimated hundred-crore annual pay-outs to the partners in each of the Big Four.
Instead of banning the entire network as was done in case of PwC, MCA appears to be set to dilute its stand in case of IFIN as stated above. At the most, it may levy a petty monetary fine on Deloitte and KPMG network firms.
At a recent Confederation of Indian Industry (CII) event, a senior union minister was reported to have exhorted senior lawyers and representatives of the Big Four present there to follow the law in letter and spirit or face serious consequences. A pep talk from him to the MCA may go a long way in realising the cherished desire of Prime Minister Narendra Modi to see at least four Indian firms amongst the Big Eight by 2022.
Sarvesh Mathur is a senior financial professional, who has worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.
