Corporate Affairs Secretary Injeti Srinivas said in an interview to PTI, “Prima facie, it appears that they (auditors) have many questions to answer in IL&FS. If they are found at fault, action is bound to happen.”
IL&FS crisis, sitting on a debt burden of Rs.94,000 crore, has put the focus light on the role of auditors. If they are meant to be gatekeepers or ‘bouncers,’ keeping the riff-raff out, how did they fail so badly?
Another news on an auditor – Infibeam Avenues announced that it has fired one of its joint statutory auditor, SRBC &Co, an Ernst & Young partner firm as it shared unpublished price-sensitive information with personal e-mail accounts of their team and third-party on multiple occasions leading to breach of trust and loss of faith.
These two news does make one wonder about the role of auditors today; we are talking about highly reputed, the BIG 4 or BIG 6 auditors, enjoying international repute. How can they err like this?
More importantly, what possible action will we take on these huge MNC CA firms when they are so integral today? Really, the question we are asking now is – how will we police the policemen?
Deloitte Haskins & Sells is one of the BIG 4 accounting firms, under whose watch the IL&FS crisis happened. BSR &Co, a member firm of KPMG is also equally responsible. What were the firms doing while IL&FS kept on piling up debt? The Ministry of Corporate Affairs is considering penal action, including a long-term ban on Deloitte. Well, we do not have much faith is this action as history has proven that it is usually too little and too late.
In case of Satyam Computers; remember it was PricewaterhouseCoopers (PwC) under whose watch the entire scam happened. After 9 long years of investigations, SEBI did find PwC guilty. The penal action - ban on PwC from providing audit services to listed companies for two years and a disgorgement of Rs.13 crore. That’s all!
It is unbelievable that Deloitte did not once find any wrong doing in IL&FS. In its over 10 years of service as auditor, how come Deloitte came across nothing; there was not even one adverse finding, not even in FY18 when all hell broke loose. Were Deloitte seeing the same balance sheet or were they on some other page altogether? How could the auditor rely merely on management explanations and ‘comfort letters?’ How can a firm which is so huge compromise on its independent opinion?
Well, in USA, Arthur Anderson was punished duly for its role in the Enron scam, which connived with management to cook the books. A part of the BIG 5 then, it was forced to surrender its license to practice though it took to legal recourse. Yet, today, this big auditing firm does not exist.
Can we ever have the guts to do that to Deloitte? Despite the magnitude of the IL&FS crisis, all that which the Govt wants to do to Deloitte – several penalties and maybe a 5 year ban. But then if this investigation also takes a decade to complete, what’s the point? Why can’t Deloitte and KPMG be kept away forever?
The hard truth is that we cannot do anything beyond a token ban because we need these BIG 4 auditors to get that stamp of ‘quality.’ For top companies and global investors, these four are a necessity, irrespective of the scams happening under their watch. The logic is that if such things can happen under these BIG 4, imagine what could happen if they go with Indian bred CA firms alone? The perception is that there aren’t enough quality firms in place for top notch companies.
The other big truth is that these firms have become too big to fail and if are attracting FIIs in droves, we need the presence of these firms to given them that sense of familiarity and comfort.
Why can't we have a rethink on the role of the BIG 4 in the backdrop of this IL&FS crisis? Why can’t we think of something revolutionary like mandatory joint audits with Indian bred, non-BIG 4 firms? This skewed system of complete concentration of the BIG 4 is a huge risk. Indian CA firms need to rise, prove their integrity and India Inc too needs to engage with Indian audit firms, making them reliable and large. Can’t this also be perceived as another ‘Make in India’ move?
This is actually a golden opportunity for the Indian audit firms to rise but will they?