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Turmoil in India’s audit sector as ‘lapses’ lead to crackdown on Big 4

With more cases of fraud and financial mismanagement coming to the fore over the last few years, audit firms have increasingly come under scrutiny.

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New Delhi: The future of the audit arms of the “Big 4” accounting firms operating in India appears bleak, with two completely or partially barred from performing audit functions and the other two battling to emerge unscathed from the IL&FS crisis.

With more cases of fraud and financial mismanagement coming to the fore over the last few years, audit firms have increasingly come under scrutiny.

The Big 4 accounting firms — Ernst & Young (EY), PricewaterhouseCoopers (PwC), Deloitte, and KPMG — operate in India through their network firms: S.R. Batliboi is part of EY’s network, Deloitte Haskins and Sells is Deloitte’s network firm, BSR and Co is part of KPMG’s network, and PriceWaterhouse is part of PwC’s.

The Reserve Bank of India (RBI) Monday barred S.R. Batliboi & Co LLP from carrying out statutory audit assignments in commercial banks for a year beginning 1 April 2019.

The decision was taken after the central bank identified “lapses” in a statutory audit assignment carried out by the firm, the RBI said, without providing additional details.

It added that the decision had been communicated to the Institute of Chartered Accountants of India (ICAI), which regulates the profession in the country.

In a statement, the firm said it had nothing to add to the RBI statement.

The audit arm of PwC has been banned by the Securities and Exchange Board of India (SEBI), the regulator for the securities market, for the auditing lapses discovered in Satyam, the information technology company whose promoter swindled and diverted its funds.

PwC was handed a two-year ban that will be effective from April 2019. It did not respond to an email seeking comments.

Deloitte Haskins and Sells and BSR and Co have been named in a chargesheet filed by the Serious Fraud Investigation Office (SFIO) in the IL&FS case. They have been charged with concealing information regarding the misstatement of accounts, Mint reported.

The government has also asked the newly-constituted National Financial Reporting Authority, tasked with maintaining accounting and auditing standards in India, to start proceedings against these two firms. The NFRA has powers to ban these firms for a period of 10 years, apart from levying a fine.

Deloitte Haskins and Sells declined to comment for the report. BSR and Co said in a statement that it stood by its audit, and pointed out how it transitioned into the audit of IL&FS Financial Services (IFIN) “as joint auditors only recently in FY 18”.

It added that media reports indicated the SFIO had made allegations against BSR and Co in a report, but said no report had been made available to the firm.

“We have full faith in the judicial system and will vigorously defend our position in accordance with the law, if and when it becomes necessary,” it said.

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MNCs not new to controversy

This is not the first time these multinational firms and their Indian audit arms have come under the scanner.

Some of them have been under scrutiny for allegedly flouting rules laid down under the Foreign Exchange Management Act (FEMA).

A few Indian auditors had approached the Supreme Court challenging the way these global firms operate in India through their domestic audit arms, as well as the close relationship between the network firms and their foreign parent.

In February 2018, the apex court asked the government to look into the matter.

The court had pointed out that the local audit arms and the foreign firms were separate entities only on paper as they shared office space, personnel, telephone numbers and brand name.

It had also hauled up the foreign parent for investing in the local arms in contravention of the foreign direct investment policy through interest-free loans to the network firm’s partners.

Audit industry ‘headed for disruption’

Analysts point out that the Indian audit market seems to be heading for a big disruption if the Big 4 are banned.

“There will be big void that will have to be filled especially as these firms cater to big corporate clients,” former ICAI president Ved Jain told ThePrint.

“Audit will shift to the next line of firms — be it some multinational firms or Indian accounting firms — depending on the preference of the clients,” he said, adding that the need of the hour was “to avoid knee-jerk reactions”.

“The regulator is concerned that the audit should be done in a fair and transparent manner,” he said. “But the firms should be given an opportunity to provide an explanation rather than acting on just prima facie opinion.”

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J.N. Gupta, founder of Stakeholder Empowerment Services, an advisory firm that deals in corporate governance, pointed to the need for regulatory oversight over such audit firms, while questioning if an entire firm could be held responsible for the actions of one of its auditors.

“The auditors cannot be absolved but what about the responsibility of the board, and of the regulators in preventing such cases?” he added.

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  1. When push comes to shove, neither independent directors nor statutory auditors seem able to prevent the most egregious failures of corporate governance, even outright fraud. Consider the cases where promoters have diverted funds – mainly borrowed from banks – to private entities controlled by them. Over invoicing of imports on an industrial scale. These violations of the law are not to be confused with poor commercial judgment that can lead firms into losses. It is almost as if the auditor’s report has no value or sanctity. It would almost be intellectually more honest for the top management to self certify its accounts. Tell the world and all important stakeholders, We are people of substance, take a long term view of our role in this company, please take us at face value. 2. A small vignette from my articleship days. We were auditing the books of the Central Bank of India, Janpath Branch. One of the ledgers I checked was a personal loan taken by one Ms Kiran Bedi to buy a TV set. She was repaying it in monthly instalments of Rs 200 …

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