The Ministry of Corporate Affairs constituted Committee of Experts (COE)
recently published a report1 on regulating audit firms as directed
by the Supreme Court of India. Amongst other things, it concluded that
‘Multinational Accounting Firm’ (MAF) was a ‘misnomer’. The Supreme Court asked
them to revisit regulations to “regulate and discipline the MAFs” and lo and
behold – they have come up with a finding – there is no such thing as a MAF.
Let me walk you through some observations:
Constitution: The COE did not have any expert. The experts on
the committee are three bureaucrats with no skin in the game, no ground level
experience. Can such a committee even be considered as duly constituted as
envisaged by the highest court of India?
Selective Samples: The experts engaged 21 ‘stakeholder’2 bodies. Notable amongst them were 4 trade
associations3 ; ONLY 7 CA firms (4 MAF4 who are accused
of violations + 2 affiliated to next tier international networks and ONLY 1
Delhi Firm) and 1 Delhi CA association. Authors of earlier reports mentioned by
the Supreme Court are disregarded. Can this be considered a representative
sample? If you look at the 11 points questionnaire circulated by the COE, you
can tell that it is superficial at best. One wonders if a more accurate
description of such stakeholders could have been ‘selectholders’.
While COE did propose some new ideas in their scholarly looking report,
they seem to have not considered the main point of the Supreme Court5
with the rigour expected of them. Additionally, a report relied upon (of Chawla
committee) is not even attached. Important fallacies doled out in the Report:
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1 Finding and Recommendations on Regulating
Audit Firms and the Networks, October 2018
2 Page
204 of the COE Report
3 The
usual names who are not directly connected with the regulating audit firms, so
no skin in the game. Seemed like name lending.
4 One
of them enmeshed in one of the biggest fraud involving auditors in India and
those who were fined with about $1.5million by PCAOB for conducting “deficient
audits…”
5 Dated
23rd February, 2018
1. Conflict of Interest: These
words define the biggest problems with MAF. The report collates some ‘best’
global practices (which have not stopped this menace in those jurisdictions)
and some legal provisions but lacks original thinking and way out. The problem
obviously is not legal or about the percentage of non-audit fees – it is real –
and some real answers are missing.
Conflict of interest is a complex problem. Audit firms and group
entities operate under the same brand, common ownership and/or management and
pose as ONE in the market, and sell audit and consulting services. Tell me –
can a judge advise on potential legal scheme that might come for scrutiny in
his court? The longest serving former SEC chairman6 has this to say:
“Consulting contracts were turning accounting firms into extensions of
management – even cheerleaders at times”. The expected rigour and
innovative suggestions are missing. Should a report sound like a nod or a wink?
2. Circuitous Entry &
Control: It is a sovereign right to allow or not to allow accounting services
under similar reciprocity with other countries. The MAFs circumvent this to
operate indirectly through ‘networks’ and entities that carry out accounting
and auditing in India to which India is yet to conclude under trade
negotiations. The effective management and/or control and significant influence
of MAF situated outside, are visible and identifiable. Here are some points
whose basis is disregarded in the report although mentioned in detail by the
Supreme Court:
a. Control and Influence: CEO
changes post-Satyam debacle and global CEO comes and meets a cabinet minister.
Recently, a CEO was changed to a person who is not even a partner of Indian
registered firm or any other Indian entity. A MAF website reads thus about the
change that seems to be carried out from overseas: “… Indian Board and ratified
by the Indian partners”.
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6 Arthur Levitt
Another example7 : “All of the PwC Network Firms in India
share the same Territory – Senior Partner and Managing Partner…The PwC Network
Firms located in India share office space and telephone numbers. ..the Global
Engagement partner shall engage a senior audit professional from a PwC Network
Firm located outside India to oversee
and control the execution.
b. Business-Tests: Using brand,
marketing under the same name as MAF, cross-selling services, using
infrastructure, process, technology, people, strategy, marketing and
soliciting, influencing decisions, strategy, promotional materials, key
appointments, and other dependency etc., show that the MAFs operate in India
indirectly.
c. PCAOB Orders: If you
carefully study the reports of PCAOB they show MAFs operating in India through
LLP or Private Limited entities (not registered with ICAI) and use the Indian
ICAI registered firms for audit work. A response in respect of these audits is
signed by ‘Head of Audit’ on the letter head of such MAF. Many orders mention –
partners, locations, number of professional staff etc.
3. Chequered Legacy:
Professional malpractice, breach of contract, tax shelter fraud8 ..
are some of the words used by enforcement agencies. 2018 fallouts involving
MAF: Carillion9, Steinhoff, Colonial Bank & Federal Deposit
Insurance Corp10 , Quindell11 , Ted Baker12 ,
BHS and these stories of fines just don’t go away. Would you call such MAFs
‘reputed international brand name’13 ? A reasonable question that
arises is: why does the report refer to MAF as ‘potential indemnifier of
losses’ and their appointment ‘signalling a superior quality of audit’?
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7 PCAOB Report Dated April 5, 2011 in the
matter of Pricewaterhouse
8 KPMG Tax Shelter Fraud – admitted charges of
criminal wrongdoing to help dodge $2.5 billion and agreed to pay $456 million
(about 2700 crore) involving partners, deputy chairman, and others with similar
titles.
9 Reported in UK newspapers and attributed
to UK MPs: KPMG (earning about £ 1.5 million/year) were rubber-stamping figures
that “misinterpreted the reality of business” … “in failing to exercise professional
skepticism…. KPMG was complicit in them”. The failure included “accounting for
revenue that had not even been agreed” [Some others used a more terrifying
language.]
A report, that in parts reads like a prospectus of MAFs, in praise and
even awe and seeks to wipe clean the past in disregard to the Supreme Court
directions is fit for rejection. One wonders why would a ministry report
disregard the obvious, discard the well reported and ignore what the Supreme
Court has said in such detail. After reading the conclusion given in the report
that ‘Multinational Accounting Firms’ is a misnomer, one wonders whether the
word ‘expert’ is a misnomer too!
Raman
Jokhakar
Editor
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10 Federal Judge asked PwC to pay $625 million to
FDIC in one of the largest bank failure. Deloitte had earlier settled a claim
of $7 billion at an undisclosed amount in a fake mortgage case of TBW collapse
relating to the same matter. (www.marketwatch.com April 7, 2018)
11
KPMG fined £3.2 million after the
accounts were restated twice. This is a reduced fine as they chose to settle.
12 KPMG fined $3million by FRC for admission of
misconduct for providing expert witness services in breach of ethical standards.
(FRC website 20.8.2018)
13 Page 63
