Auditing The Auditors
Legal Notes|July 2019

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.

​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”.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM LEGAL NOTESView All

Time For Action

Since time immemorial, the environment has had a larger-than-life place in the Indian scheme of things. But the Nineties and the new century have really been a sad story of a virtually unending line of laws failing to combat the increasing levels of pollution brought forth by urbanisation, and the global pressure about greenhouse emissions resulting in the Paris accord that now brings in its wake greater pressure on countries to tighten laws. Amidst all this, India shines as a classic example of the irrational mindset of enacting more laws to produce less pollution. RACHANA RANA BHATTACHARYA, while examining the dizzying number of laws that engulf us and the incredulously lopsided judicial pronouncements made by different courts, poses a simple question: What is the way forward?

10+ mins read
Legal Notes
September - October 2019

Who's Responsible For Fukushima?

Even as the Fukushima nuclear disaster continues to haunt a section of the Japanese people and the world, a Japanese Court’s decision to acquit the nuclear power company, TEPCO’s bosses after three years of trial, raises questions over the use of nuclear power for energy needs.

5 mins read
Legal Notes
September - October 2019

Tata, Bye-Bye?

What would one choose between their right to vote in local body elections and to receive world class civic amenities? The answer isn’t as simple as it looks. Jamshedpur — the land of the Tatas has been struggling with this question for the last 30 years and looks like they still haven’t found an answer. Maintained by the Tatas, there has been a steady incline in the number of voices demanding a government operated municipality to take over the town. In the midst of consecutive orders by various High Courts, the Supreme Court and clashing opinions, SHWETA MENON in her visit to the steel city found that the majority verdict by the janta remains in favour of the Tatas.

10+ mins read
Legal Notes
September - October 2019

No Winners In The Opioid Case

Pain can make you rich and the opioid issue in the US is testimony to that. But other than the wealth it spawned, opioid has generated a huge number of legal cases in the US – and quite a few of them have been filed by the states. Will the Sacklers, one of the richest families in the US and the makers of the pain-relieving drug OxyContin, go scot free?

9 mins read
Legal Notes
September - October 2019

J&-K A Jumble Of Laws

The transition of Jammu and Kashmir from a state to a Union Territory hasn’t been an easy one.

2 mins read
Legal Notes
September - October 2019

No Fishy Business

Belief, they say, moves mountains or in this case cures asthma. The annual Fish Prasadam jamboree in Hyderabad – that has been going on for the last 174 years – attracts asthmatic patients in thousands from all over the world. Legal Notes peeps in to provide a low-down on the hugely popular ‘fishy business’.

1 min read
Legal Notes
July 2019

No Kingdom For Lions

A new in the list of PILs seeking to address and act on the issues of wildlife conservation is the one filed by wildlife activist Biren Pandya. This time it is for the protection of Asiatic lions. With the primary concern being around their unnatural deaths, the PIL finds resonance with a similar one filed last year for elephants. But the question that one needs to ask is where are we headed with these individual PILs and suo moto cases, if all that is being done on the ground is the shooting of these animals to drive them away.

7 mins read
Legal Notes
July 2019

Another Toothless Commission!

There was a walkout by the opposition, protests were staged across the capital, activists were shoved into police vans, letters were written to the President urging him to not sign the amendment and yet the central government was finally able to hit a six in its second attempt this year to amend the RTI (Right to Information) Act!

3 mins read
Legal Notes
August 2019

Labour's “Decent Life” Dreams Continue

“Every moving The Code on Wages Bill, 2019 made it a point to inform the Members of the Rajya Sabha that the government had accepted 17 out of the 24 recommendations made by the Standing Committee which had scrutinised a similar bill introduced in the previous Lok Sabha.

3 mins read
Legal Notes
August 2019

Article 370 - The Albatross Around The Neck

Considered an ‘albatross around the neck’ by the present BJP government at the centre, the sudden and surprising abrogation of Article 370 has opened the doors to a flood of emotions. The abrogation will be debated and tested in the Supreme Court, but it seems that the move has already won in the peoples’ court.

9 mins read
Legal Notes
August 2019