Chartered accountants and auditing firms in the country – especially the big four – are in the spotlight for their transgressions that have largely gone unnoticed. Now that the government has introduced the National Financial Reporting Authority (NFRA) under the Companies Act, 2013, CA firms and CAs can be investigated. A special report on the government's determination to hold auditors accountable and the tightening of the regulatory framework.
“CA is an arrangement in which the human resource development is done only by you. The curriculum is made by you only; you conduct the exam; rules and regulations are also made by you, and your institute only punishes the culprits.” “Now the question arises that the temple of democracy i.e. the Parliament of India, which is the voice of 125 crore countrymen, has given you so much authority, then why is it that in the last 11 years, only 25 charted accountants have been prosecuted? Did only 25 people make a mess? And I have heard that more than 1,400 cases are still pending for many years now. A single case takes years to settle…”
That was Prime Minister Narendra Modi in his foundation-day speech on July 1, at the Institute of Chartered Accountants of India (ICAI). Since that scorching indictment of the ICAI, the government has moved slowly but relentlessly to tell the CAs of their transgressions and the old boys club that the ICAI had become over the years.
In the United States, the Enron Financial scandal was enough to bring the shutters down on Arthur Andersen and Company. That’s how ruthlessly tough regulators were in that country. A milder form of that toughness is now evident in the Indian marketplace.
The problem, however, is the inordinate delay taken by the justice system to deliver its verdict. Take the Satyam scam for example. Its timeline is telling:
• The Satyam scandal was India’s biggest accounting fraud when it was unearthed in January 2009.
• Handled by the SFIO, it submitted a report in April that year that pointed towards the falsification of accounts. It was outlined that two Price Waterhouse auditors were part of the cover-up.
• The Supreme Court asked that the trial in the matter be completed by July 31, 2011.
• The special CBI court’s final verdict came six years after the fraud on April 9, 2015,
• Satyam founder Ramalinga Raju and nine other accused including the two Price Waterhouse partners got jail sentences of close to seven years.
• In May 2009, a metropolitan sessions court in Hyderabad granted bail to Raju and nine others and suspended their sentence.
• Since then, no one has challenged the order of the sessions court.
• SEBI has now taken over seven years to deliver its verdict on the issue.
For the CA community, the first big seismic shift, if one can use that phrase, was the government’s tough order against one of the Big Four auditors in the world — Price Waterhouse Coopers (PwC) in the SCSL (Satyam Computer Services Limited) case. SEBI had ruled that the provisions of the SEBI Act were violated and certain directors and employees of SCSL connived and collaborated in the overstatement, fabrication, falsification and misrepresentation in the books of account and financial statements of SCSL. The statutory auditor of Satyam from April 1, 2000 was Price Waterhouse (PwC).
In an order in January 2018, SEBI said PwC firms benefitted from the relationship with SCSL by having received a fee of over `23 crore during 2000-2008. Of this, over `13 crore was paid towards PwC Bengaluru for the audit of SCSL. In its 108-page order, SEBI imposed a two-year ban on entities/firms practicing as chartered accountants in India under the brand and banner of PwC from directly or indirectly issuing any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with the regulator. PwC has appealed the ban that is being heard by the Supreme Court.
â€‹A consequence of the PwC order by SEBI has been the deep introspection in audit circles particularly amongst the big four — Deloitte, PwC, EY and KPMG — and their group of associate or satellite companies that are under tremendous pressure due to the investigations in Infrastructure Leasing and Financing Services (IL&FS) and two of its subsidiaries.
The Serious Fraud Investigation Office (SFIO) has alleged negligence and connivance between auditors and management in its chargesheet filed in the IL&FS Financial Services Ltd case that will most certainly see several being blacklisted. In its recommendation regarding the auditors, the investigation report has said that the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) should take action against the auditors as per the applicable provisions.
This has been suggested against the backdrop of the recommendation for "removal of existing statutory auditors (BSR & Associates LLP) and action against Deloitte, Haskins & Sells (DHS), who were auditors till 2017-18, when they were changed on account of mandatory rotation, for their fraudulent conduct during their period as statutory auditor”.
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