In celebration of its 50th Volume – the BCAJ brings
a series of interviews with people of eminence, the
distinct ones we can look up to, as professionals. Those
people who have reached to the top of their chosen
sphere, people who have established a benchmark for
others to emulate.
This second interview is with Mr. Y. H. Malegam.
Mr.Yezdi Hirji Malegam is well known in the fraternity of
professionals – on both practitioners’ as well business
side. He served as president of the ICAI (1979-80), served
on the Board of the Reserve Bank of India (17 years),
and was awarded Padma Shri (2012). Academically, he
holds a particular distinction of passing both the Indian
Chartered Accountancy examination (stood first and won
a gold medal) and Society of Incorporated Accountants
examinations (stood first and won a gold medal).
Mr. Malegam was appointed on several committees/
commissions of significance. He also led one of India’s
oldest professional services firm for decades. However,
what surpasses his achievements and accolades is the
respect people have for Mr Malegam for his integrity,
clarity and the wealth of experience which is the true
hallmark of a professional.
In this interview, Mr Malegam talks to BCAJ Editor Raman
Jokhakar and BCAJ Past Editor Gautam Nayak about his
formative years, accounting and auditing aspects of the
profession, current issues before the profession, personal
anecdotes from his sixty plus years of career….
(Raman Jokhakar) Tell us a bit about yourself as a
young professional. What was it like growing up as a
fresher then?
After graduating as a B. Com, I started articles with
S. B. Billimoria & Co on 30thJune, 1952. I was 18 years
old. I spent the whole of my first year of articles at
Jamshedpur, where we were auditing Tata Iron & Steel
Co Ltd (Tata Steel) and Tata Engineering and Locomotive
Co Ltd (TELCO). It was a great learning experience.
These two companies had perhaps the best corporate
accounting systems, and they were amongst the few who
had started using the mainframe Punch-Card Hollerith
machines. It gave me the opportunity to audit a variety of
activities, including manufacturing, sales, iron ore mines,
collieries etc. This was the period when there was large
capital expenditure in Telco, and it was an opportunity
to understand how contractors’ bids and escalation
claims should be examined. It was also an opportunity
to appreciate how the use of accounting machines could
change the traditional audit programme. S. B. Billimoria
& Co were the main auditors of the Tata Group and the
Wadia Group as also Volkart Brothers, amongst a number
of business groups, and were auditors of the Reserve
Bank of India, the State Bank of India and almost all
the large Indian banks. Even while I was doing articles
for the Indian Institute, I was simultaneously doing byelaw
service for the Society of Incorporated Accountants,
London (which subsequently merged with the Institute
of Chartered Accountants in England and Wales). After I completed my articles in June 1955, I continued with the
firm for one year, during which time, I took charge of a
number of audits of the firm. I qualified in England in July
1957 and returned to India and rejoined S. B. Billimoria &
Co and became a partner on 1stJanuary, 1958.
I was immediately given some important and interesting
assignments. LIC had been formed with the amalgamation
of over 230 individual companies, and it was a gigantic
task to amalgamate the financial statements of the
companies. LIC had 12 auditors, but S. B. Billimoria & Co
was one of the four central auditors, and this task had to
be mainly done by me.
The Durgapur Steel Works were being constructed by
11 British firms under a contract with the Government of
India, whereby the individual firms sold the equipment
but formed a company (ISCON), which did the erection
on a cost plus basis. Price Waterhouse was appointed
by ISCON and we were appointed by the Government
to jointly certify the bills for construction. I was asked to
go to Calcutta to attend a meeting with ISCON and given
two large volumes of the contract, which I studied for the
first time on the long flight to Calcutta and thereafter, I
was in charge of this work. We had appointed Mr S. V.
Ayyar, a retired Chief Cost Officer of the Government
as our consultant, and he worked with me. I learnt a
lot from him as to how to audit construction invoices,
which stood me in great stead throughout my career.
For example, steel scrap had to be segregated between
structurals which were above a specified length, which
were sold as structurals, and which fetched a much
higher price as compared to those below this length,
which were sold as scrap. Similarly, for all construction
bills, it was necessary to examine the drawings and
ensure that the quantities billed were not in excess of
the quantities as per the drawings. On one occasion,
a sub-contract had a performance incentive, whereby
savings in cost was to be shared with the sub-contractor.
The incentive for which payment was made was a large
percentage of the estimated cost. I challenged this and
argued that obviously the estimates were understated.
This was disputed by the local office of ISCON, and
it was accepted only when, on a visit to UK, I met the
Company’s senior officials in the UK and convinced
them about my stand. Later, when examining the
fabrication bills for the capital expenditure at Telco, I
noticed that the escalation claims had been made and
accepted on the basis of the standard escalation claims
of the industry. I pointed out that the standard claim was
based on a standard percentage of the rate per ton of
fabrication, and it had been overlooked that there were
two rates which were applicable, namely one where steel
was supplied by Telco and second, where the steel was
supplied by the fabricator. The application of a common
percentage on both rates resulted in gross overpayment
where steel was supplied by the fabricator. This resulted
in substantial refunds from the fabricator for work already
done, and even more savings for work still to be done.
(R) What are the important parts of your daily
routine? Has it changed over the years?
From my student days, I always liked to start early in
the day. Even today, I wake up between 6 and 6.30 am,
take a morning walk and then start work by about 7.30
am. The best work, I feel, is done in the early part of the
morning, especially the work that involves thinking.
(R) What was your idea of success when you were
in your 20s? Did it change over the decades?
I am not a very ambitious person. I did not have a
concept of wanting to achieve something. However, I can
say that some incidents played an important role in shaping
my career.
In those days, there was no idea of increasing the business
by taking the work of someone else. We were the auditors
of RBI and of all its subsidiary corporations. I remember
that when the UTI was formed, we were closely involved in
its formation. You might still find some early documentation written in hand by me in formulating the regulations and Dr Pendharkar, the first CEO of UTI has acknowledged
this in his book. Since we were involved in its formation,
we expected that we would also be appointed as its first
auditors. However, after the formation, UTI appointed A
F Fergusson & Co. as auditors. After about two years,
the Chairman of UTI called Mr. Billimoria and said he
wanted to meet him. Mr. Billimoria asked for the reason
of the meeting. The Chairman said that they wanted to
appoint us as the auditors of UTI. Mr. Billimoria enquired
more about the matter, and the Chairman explained
that there were some differences with the auditors. Mr.
Billimoria asked the Chairman to give him the name of the
concerned partner, and told him that he (Mr. Billimoria)
would bring that partner of A F Ferguson & Co with him
to the UTI Chairman so that the matter can be sorted
out. These were the value systems, which have always
guided me.
(R) Who were your role models and mentors? How
did they shape your career?
My parents were my earliest mentors. My mother was
one of the first woman graduates and was a principal of
a school. Due to this, although she wanted me to study,
she insisted that after coming back from school, I should
go out and play and do school work later in the evenings.
This inculcated my interest in sports. I played cricket a lot,
both for my club and also my college, and represented my
Gymkhana in badminton and table tennis.
My father was a self-made man. He couldn’t complete his
studies in medicine due to financial difficulties, because
he lost his father when he was eight years old. He started
and ran a surgical equipments business, which he built
up successfully. He was more like a friend, and did not
impose things on me that I had to accept because he was
the father.
I was lucky to have good professors who took interest in
me in college and then of course there was Mr. Bhikaji
Billimoria. After the loss of my father, our relationship was
like father and son. He was a complete gentleman in all
respects. By his example, I learnt many things, including
how to behave with clients and colleagues, and most
importantly, never to compromise.
(R) What are the top lessons you learnt over
the past 8 decades that you wish to share with the
present generation?
i.To learn to ask questions and not be scared to show
my ignorance of a subject.
ii. Never to be patronising and to treat all persons
equally, irrespective of their social standing.
iii. Never be unwilling to admit mistakes and take
corrective action.
(R) Looking back, is there something you feel that
you could have done differently in your career?
I feel I should have given more time to understanding
information technology, where I am particularly deficient.
Earlier, I also used to practice income-tax and enjoy it.
Unfortunately, I could not devote enough time, as I got
more and more involved in the audit practice.
(Gautam Nayak) As a leader of a firm with stature
and long standing, what were the important pillars it
was built on – that new entrants could emulate?
i. We placed great emphasis on client acceptance and
retention. I had made a policy on acceptance or retention
of a client. Every partner, before taking a new client, had to
discuss it with me to ensure that the new client met those
criteria. Similarly, if a partner was unhappy with a client,
he was encouraged to discuss with me, the question of
whether the client should be retained.
ii. We never wanted to build a firm that was the largest or
the most profitable. The goal was to build a firm that was
most respected.
iii. Competence, fairness and integrity were the most
important aspects of the firm’s practice. Client’s
confidence in us was the most important aspect. Once we
felt that client confidence was not there, we would give up
the client. On one occasion, we had a different view with a
client group that constituted nearly 10% of our revenue. I
was the chairman of the Research Committee of the ICAI,
and a paper was presented at a Seminar in Mumbai which
suggested that customs duty need not be added as an
element of cost in the valuation of inventories. This paper
was sent to the Research Committee for consideration.
We thought that this was not a sound accounting practice,
and issued a guidance on that basis. One of the firm’s
clients, handled by another partner, had followed this
practice, as did many other companies after the Seminar.
Mr. Kuruvilla, CBDT Chairman, asked the CIT, Mumbai
to call me and discuss the whole issue of the accounting
practice. Since I was aware of the practice followed by
our client, I checked with the client if they would mind
me attending that meeting with the CIT to discuss the
matter. The client did agree. When I saw what the tax
department was intending to levy as additional tax on the
client, I told the department that the additional tax was
payable, but that the computation was excessive, which
the tax department accepted. However, the clients felt
that I should have defended their position, as they did
not want to change their stand. I told my partners that we
should not compromise, and that we should give up the
client. The client persuaded us not to do so, but within
a year, other issues arose, as the confidence had been
destroyed, and we gave up the group.
At the same time, it was necessary to demonstrate to the
client that we were willing to assist the client to act in any
way which was legal and permissible.
On one occasion, one of the Tata group entities suggested
an accounting adjustment, with which I did not agree.
However, on enquiry, I ascertained that they wanted to
give a dividend, but did not have enough profits to do so.
They had consistently given dividend, and wished to carry
on that practice. In those times, investment allowance
reserve was created in the accounts, which was meant
to be retained for seven years. Now that the seven years
had already passed, I suggested that this amount could
be brought back to the profit and loss account since it was
taken out from profit and loss account at the inception of the
reserve. The client took some time, and took an external
opinion, and came back saying that this was not possible.
They had taken an opinion of Fali Nariman. I asked the
client that I would like to meet Fali and discuss the matter.
After the meeting at the Oberoi, Fali Nariman agreed with
my view and even asked me to draft an opinion that he
could sign and give the client. This demonstrated to the
group that our approach to the audit was not negative and
encouraged the client to freely discuss with us all issues
with the confidence that we would permit everything which
was legal and acceptable, and at the same time not allow
anything which was not legal.
iv. When invited to speak on or contribute an article,
select a subject you do not know, rather than a subject
you are familiar with. This is the best form of learning, as
you prepare for the talk or article.
v. In building a professional practice, it is important to
attract talented individuals. In our firm, we did this by
identifying exceptional individuals at an early stage in
their career, giving them positions of responsibility and
empowering them and by having a policy of promoting
persons to partnership purely on merit, irrespective of
religion or caste or other considerations. In our firm, we
had partners of all communities, and no partner was
related to any other partner.
(G) Can you share your experience of the move from
heading a leading CA firm to being part of a Big N firm?
We had international affiliations for many years even
before I became a partner. However, this was mainly an
arrangement for mutual assistance. The international firms
referred clients to us and we allowed them to examine
our working papers to give them confidence about the
quality of our work. We also attended their international
conferences and built up personal relationships.
When we joined Deloitte Touche Tohmatsu in 2004, the
Indian firm consisted of S. B. Billimoria Co, C. C. Chokshi
Co and Fraser and Ross. N. V. Iyer and I became Co-
Chairmen of the firm. We shared a wonderful relationship,
as we were, and still remain, good friends. We both retired
in 2004, and A. F. Ferguson & Co. joined thereafter. The
Indian firm is, therefore, a combination of 4 large national firms. It is not controlled by an overseas entity. Only for
the purpose of technology or certain technical matters,
we had people from overseas. The benefits also flowed
the other way – when our Indian clients invested and
expanded overseas, Deloitte was appointed to do their
work in those countries.
One change that did happen. As the number of partners
increased, it became necessary to share profits on a
more results-based system and performance gradation
criteria became important for both partners and staff.
The international affiliation has greatly increased the
competence of the firm, as it had greater access to
technical inputs from overseas, as also the ability to refer
to international offices for guidance on specific issues.
(G) Worldwide, more and more reliance is being
placed on valuations and estimates, which are often
highly subjective, for the purpose of accounting.
Valuers are not as regulated as public accountants are.
Is the increasing role of valuation in accounting, more
specifically in relation to fair value measurements,
making the accounts more subjective and perhaps,
less reliable too?
The one area, other than audit, where I have done much
work, and to which I can claim expertise, is valuations.
When you do valuations, you have to have access to
information, which is otherwise not available in the public
domain. My view has always been that valuation based
approach should be applied to instruments listed in the
markets because the information is available. Valuation
based approach is also justified for associates and
subsidiaries, because the information is also available.
But applying fair value to unlisted entities does not seem
reasonable and practical since the information in the
public domain is often inadequate.
Fair value is largely applied to financial instruments, where
estimates are involved. Therefore, most other entities are
not significantly affected by fair value measurements.
(R) Is auditing becoming more a task of form over
substance? There is documentation and paperwork,
but auditor’s judgement could be missing. These
days, 60% or more time goes into documentation as
compared to actual testing and asking questions.
Is proving that procedures have been followed
becoming more important than the actual application
of mind? Is this desirable? Have the fundamentals of
audit changed?
One thing is that the auditor needs to be more
sceptical. In the olden days, you assumed that everyone
was a gentleman, and you accepted what they said. Now
you have to be sceptical of the people at the highest
level because all of these frauds take place. Not fraud in
terms of taking money out from the company, but fraud
in falsification of accounts for a number of purposes.
This is a grey line, at which things can be done without
your knowledge, so you have to be much more sceptical
during the audit.
I think you also need to realise that documentation is there
for your protection, but documentation alone does not add
to the value of audit. Except, of course, the very process
of creating documentation means that you do not leave
out some essential parts of the audit. To that extent, it is
useful, but it is not an excuse for not doing a good audit.
The other feeling is that when you had a lot of manual
work, which was being done earlier, accuracy of
accounting was one of the objectives. You had to balance
the trial balance, you had to take totals, you had to do
postings; now all that is gone – machines are doing all
that. Therefore, in the olden days, you needed a lot of
junior staff to do this work. Now that need does not arise.
Therefore, an audit cannot be done by junior staff. You
now need to do audits only with higher level of staff. And
therefore, the professional now has to think about this –
that can you afford to do auditing, when you rely upon
the work of juniors, when in effect the skills needed are of
a much higher level? That, I think, is affecting firms from
properly addressing the problem.
If I may take an example, if you are talking of concurrent
audit in banks – the whole purpose of the concurrent
audit was to prevent a malpractice before damage takes
place. And therefore it was nothing else, but equivalent
to internal audit, but internal audit done concurrently.
Therefore, you need much higher skills. And if you do not
do that, if you entrust that work to the articled clerks or the
people who have no maturity or the understanding of this,
you are not serving any purpose. In fact, you are creating
a worse situation, because you rely upon something, you
assume that is done, but there is no such control. That I
think is the big area, which you have to address.
And the other thing is, I think, increasingly now the
purpose of audit is changing. In the past, the purpose of
audit was to give some degree of reliability to the financial
information. Now, reliability by itself is not enough, with
increased computerisation, it is assumed that it will be
reliable. What is now needed is some assurance that
there is no mismanagement, that there is no fraud; some
assurance that you are able to provide to the reader. See
and answer the questions like – What is the future of this
company? Is this run as efficiently as it should be run?
This is where the changes are taking place.
(R) How do you see the audit profession developing
in the future? Would use of technology, such as
artificial intelligence, replace a significant part of the
audit process and audit judgement in the future? Or
would it only help in reducing test checks?
One of the things perhaps I was thinking about, is the
perception that the big firms are doing better audit. I think
one of the reasons perhaps is, that in the big firms there is
now specialisation. The Audit partner does only audit, the
tax partner does only tax. Now, in the smaller firms, the
same person is doing both audit and tax. I feel somehow,
that maybe you are not developing sufficient skills in either
area, in trying to do both. You may be an average auditor
and an average taxman, whereas if you specialise, you
would probably be a very good auditor and a very good tax
practitioner. Now this is the problem which is faced, and
therefore, what can the profession do? We are producing
a large number of members, and there is just not enough
work in the audit profession for them. Therefore, for those
areas which are more individual oriented, where you need
individual skills, there is no harm in having small firms, just
as you can have a lawyer who is appearing in the court as
an individual. He can have few support staff, and he can
have a huge practice. But you can’t have a solicitor’s firm
without having a large number of people specialising in
different areas. Now that is one of the basic issues in the
profession. If you want to go into the audit area, people
must get together and create larger entities; without that,
you cannot function, because you need larger staff, you
need more finances for systems, for machines and for
various other purposes.
The second is – that the skills have to be upgraded and I
don’t know whether we are doing that adequately. If you,
for example, find that people want more assurance than
there is available today, then obviously you will need to
have the skill to do that. What is needed is to understand
what is a good system of internal control, to know how
you detect fraud and what are the forensics skills that you
need. I think we are not doing enough of it in the training.
We keep on doing the same training over and over again.
I used to tell that even in the olden days to my staff – I
said “You are only looking at the paper. If someone gives
you a bill that he travelled by taxi, you will accept that bill.
You don’t know who has signed that receipt or if such a
person exists, but if a man tells you that he travelled by
taxi, you will not believe him. Now, perhaps you can be a
better judge to see whether that is a person, whose word
you can rely on, rather than a piece of paper”. Now that is
the skill which you have to develop, what is the relevant
evidence for checking the transaction, not just a piece of
paper. That is the whole point.
(R) Meaning, the amount of questioning or the type
of questioning and judgement?
Not just questioning. First is, that you are dealing with
people you must have the ability to assess, on whom you
can rely, and on whom you cannot rely. You have to be a
good judge of people, and you can find that out straight
away. There are some people whose honesty you do not
doubt. I am talking about intellectual honesty. Then there
are other people – you feel that maybe he is just trying to
tell you what you want to hear. So you have to understand
that you have to be polite, good but, at the same time,
sceptical. You have to put yourself in the shoes of that
person. If there is a company which is making losses, the
normal practice will be to try and reduce the loss, if it is
making profits, the practice will be to put some cushion
there, that sort of a thing.
(R) Few questions on the professional scene in
India: The Chartered Accountancy profession was
built on certain values and principles. People who
know you, hold you in the highest regard in terms of
abiding in and living those values. As you interact with
professionals – be it Directors, Auditors, Regulators
– do you feel that some of those fundamentals have
undergone a change?
I have personally not come across people for
whom I would say that I have some reservations about
them, but I have at the same time found the general
impression of others to be that standards have declined.
That is unfortunate.
I will give you a specific example. I was talking to some
bank people, the Managing Director of a bank, and I was
trying to work out how we can make better systems,
so I was making some suggestions, and I said, “If you
can get the borrower to submit audited certificates on
these aspects, then it will give you a better control.” And
I was shocked to find the response from that person,
when he said, “No, no, no, after all, all these auditors
certificates are fake certificates. We cannot rely upon any
of these auditors certificates”. And this, unfortunately, is
happening, because either the auditor or the person who
gives the certificate doesn’t understand the importance
of that certificate or he is too much indebted to that client
that he cannot afford not to do this.
Therefore, as far as the profession is concerned; we
have to have a zero tolerance practice. Again, I will
give you an illustration. When I was the president, there
was Mr. D’Souza who was the Commissioner of Income
tax. In the morning one day, I read in the newspaper a
report about some raid, and one Chartered Accountant
who was involved. So I went that morning to Mr. D’Souza
and I said, “Can you make a complaint against this
chartered accountant?” He was shocked, and he said,
as a President, he had expected me to protect the
member, and here I was asking him to make a complaint
against a member. I told him that “Sir, I am protecting
my members. By making a complaint and by punishing
this person, I will give the right message to the rest of
my profession. Whereas without that, it will be assumed
that the whole profession is of that type”. So that’s why I
am saying that we have to have zero tolerance. Anytime
something happens, you have to punish people who are
guilty because ultimately they are the custodians of a
brand. Chartered Accountancy is something which should
carry a lot of respect. The fact that you are a chartered
accountant must be synonymous with the fact that
you are a person of integrity. Now if that brand is
damaged, the whole profession gets damaged.
Unfortunately, our value systems have changed. You
admire a person who is very successful and how do you
measure success? You measure success by the fact that
he has got a large practice, or that is he making a lot of
money or that is he able to buy a large office. In our days,
we never looked at it in that fashion. We looked only at the
respect a person commanded, and the fact whether he
had a large practice or small practice didn’t matter.
(G) Related to this fact – Some people believe that
the distinction between business and professions,
such as the CA profession, has now blurred, and that
every profession has to function like a business to
grow and survive. What is your view?
See, I think there is some force in that. What has
happened is, that you have composite firms. You
have firms that do auditing, they do taxation, they do
management consultancy, they do advisory services etc.
So when that happens, naturally the people you take on
in the firm include non Chartered Accountants. In the old
days, you had one or two or a few of these people, now
a majority of the people are non Chartered Accountants.
They don’t have the same background, discipline etc.,-
they are result oriented. And when they are result
oriented, their whole value systems are different. Not that
they are dishonest, but for them getting work, making
larger profits, these all are more important. What is
happening, therefore, is that in these firms, the Chartered
Accountants are feeling the heat. Their performance
evaluation etc. is now being judged on the same lines
as the others. And therefore, there is a strong temptation
sometimes to cut corners. Even in the olden days, when you had people, in say a commercial organisation, you
had a chartered accountant and you had an MBA, and
the MBA seemed to be more progressive, more dynamic
and then the chartered accountant in order to survive, had
to become more dynamic – that sort of a thing. So there
is that risk, but ultimately this is what I feel – no individual
can use this as an excuse for rationalisation. The final test
for an individual is to be his own judge. If he believes that
what he is doing is ethical, his conduct is correct etc., then
it doesn’t matter whether the whole thing is becoming a
profession or not, or whether it is becoming a business.
Even within a business, you can act like a profession.
(R) About Work and Lifestyle that is changing these
days – Today in spite of technology, most people
around us are more stressed. There is more stress
and burnout amongst CAs. You worked during times
when there were no calculators, and everything had
to be done manually. What has changed?
The burnout is not because of technology, in fact,
technology helps you. This burnout is again because of
how you measure success. What do you want to achieve?
Contentment is a very difficult quality. Peer pressure is
there, and all of these situations lead to it.
[R] Having been a director of many companies,
what are your views on the overall quality of audit in
India and the independence of auditors?
Well, I have not had any occasion whereby I can say
that I have had any reservation about the quality of audit
or about the independence of the auditors. In fact, I would
say that the audit quality over the years is quite good and
it has improved. But I have been connected for auditing
with some big audits and big firms; I can’t really judge this
for smaller companies. But as I said, it’s only in some of
the financial institutions, where this feeling is there that
the reliance on the information which is provided, duly
audited, is not of the quality that one would have expected.
(G) With so many high-profile frauds becoming
public, auditors are being blamed. Is the criticism
justified? What are the real causes for this? You
mentioned about bank directors feeling a certain way.
Do you feel that the role of auditors needs to undergo
a change to match changing public expectations? Or
is a publicity initiative required to educate the public
(besides the Government) as to limitations of an
audit? What, in your opinion, is the long-term remedy
to meet this mismatch?
You see, it is very difficult at this stage to say, but
basically, you can have frauds which are facilitated by
a number of things. You can have a situation of a fraud
where there is collusion between the borrower and
the staff, or there is failure of the staff to perform their
functions. I don’t think external auditors can have a role
in this. You can have a problem, where the borrower and
the staff exploit the gap in the internal control system, and
that perhaps is an area where to some extent the external
auditor may have a responsibility.
And just to illustrate, this question of where you have
a letter of undertaking, which is not recorded in the
accounting system itself. Then, whether the system is
such that it should have been recorded – that system failure
is perhaps where the auditor has some responsibility.
You cannot expect an auditor to look at the failure of the
internal control regulation, or internal control procedures.
That the internal auditor has to do so. I would say thisto
the extent to which there is a fraud in the nature of
the falsification of financial information, I think the auditor
needs to be held responsible.
(R) Self-regulation is seen as a conflict of interest.
Why so? There are so many places where there is
similar apparent conflict of interest – legislators
passing laws to approve their own emoluments, a
tax officer becoming an appellate officer, or a lawyerfriendly
with fellow lawyers becoming a judge before
whom these fellow lawyers now appear. Do you
agree that self-regulation is a conflict of interest, or
that it has failed? Recently we have seen quite a bit
happening – how accountants can self-regulate is
being questioned.
I believe that all professions should have selfregulation,
but I also believe that there is no harm
in having an oversight. But it’s a question of what is
oversight. Oversight is not regulation – that is the big
difference which you have to make. The oversight is to
ensure that the system of self-regulation is functioning,
but the oversight does not take over the functions of the
self-regulator.
Having said that, it is also the responsibility of the selfregulator
to be able to demonstrate that the self-regulation
is effective, that you have sufficient independence, that
there are penalties for failures, and so on. If again, I may
give an example.You look at the Microfinance industry.
The Microfinance industry was in a shambles. Then,
when we made that report, we had made a number of
regulations about what a Microfinance company could
do, could not do, etc. And, at the Reserve Bank, I was
asked, who is going to monitor all this, and I said: “Our
recommendation is that you have a self-regulatory body.
Because the whole idea is that a regulator does not have
the resources to enforce regulation”.
Years ago, when I was asked to chair the committee on
the offer documents by SEBI or it’s predecessor. Before
every prospectus was to be cleared, it was examined by
the department. And it took 2 months to clear that. Then
I said that it was ridiculous, why should you do that? You
appoint an intermediary. The merchant banker is your
intermediary. He has to ensure that all the regulations
are complied with. And then you enforce discipline on
the Merchant Banker. If the Merchant Banker does
not function, you deregister him. Now, the threat of
deregistration is sufficient to ensure that he does his job.
Similarly, SEBI doesn’t regulate, the stock exchange is
the regulator. So, there also, you may have an oversight
body, but there must be a self-regulatory body, like the
Institute, which must ensure that the regulations are
followed.
(R) In this context, do you feel that NFRA, the way
it is constituted now, in its present form justified?
Given the qualifications required of NFRA members,
do you feel that they would be able to understand the
audit process, constraints and judgement calls taken
by an auditor?
I have not studied it in detail, but my general feeling is
that the oversight body has to see the functioning of the
self-regulator, but not take over its work.
(R): Right now they have powers to investigate,
they can enforce AS and SA and they can directly
reach auditors.
I feel, that perhaps is too much. That is not the correct
approach. But then you have to demonstrate that you
are doing your job adequately. Otherwise, the rationale
of doing this is because they feel it’s not being done
adequately.
[R] What is your view on rotation for public
interest entities, particularly given the international
experience showing that rotation leads to audit
concentration?
I have always been against rotation of audits, to be
quite honest. And I think the rationale for rotation, that
I pointed out repeatedly is, that if you imposed rotation,
you will be in fact destroying the second level firms. What
has happened is that a number of the companies grow,
and as they grow, they still want to retain the auditors with
whom they have grown. But when you impose rotation,
you give them an opportunity to change their auditor,
and when they have to change, they will go to a big 4
firm. So, in a sense, a lot of the work which is there with
the second level firms will flow into the big 4 firms. And I
don’t think, quite honestly, that rotation is the answer to
lack of independence. Whereas, the answer to that is the
restriction on exposure.
I mean, if you said, for example, that you cannot have
more than X percent of your work from a single group.
Because they say, at that level what will happen is, as
I said, that if I gave up 10% of my work I could afford to
give it up, but if it was 30% of my work, I would have had
second thoughts of giving up that work. So you must not
allow firms to get into the situation where they are overall
dependent on a particular client or a particular group.
(G) For that do you feel that the concept of joint
audit should be introduced in India, to encourage
the growth of medium-sized firms, and reduce audit
concentration?
I think quite honestly the whole motivation for joint audit
is wrong. You cannot impose regulation on audit to help
yourself. This is what has created a strong dislike of the
profession, especially in the case of banks. Every time,
our Institute has gone to the Reserve Bank of India to
say, give us branch audits, because if we don’t do branch
audits, then what will our members do, it has destroyed
it’s credibility.
Is it the responsibility of the client to provide work or
is it the responsibility of the profession to offer to the
client the service which the client needs? If you tell me that the joint audit is there and it helps because the
client is not dependent on a single auditor, and it helps
independence, I would agree with that view. But then, the
client must be free to appoint anyone as a joint auditor.
But, as soon as you go and tell the client that the law says
that you must appoint a joint auditor because it will help the
smaller auditor to get work, then that’s completely wrong.
And when the profession adopts or the Institute adopts
such an attitude, then you are creating a big damage to
your image.
(R) Sir, how do you view SEBI’s recent order against
Price Waterhouse? SEBI has sought to debar not just
a partner or two or not even just the firm involved, but
it has debarred the whole group. What is your view
on this? Secondly, SEBI also brought out a lower test
of ‘preponderance of probability’ as a sufficient test
in this specific matter instead of applying the test of
‘beyond reasonable doubt’.
I don’t know the details of this ‘preponderance of
probability’ which you are talking about, but I do feel that,
when you take action against a firm, and you take action
against an individual, the action against the individual
should be on the ground that the punishment for an
individual should be to debar him from doing the work
for a period of time or for all time, depending upon the
severity of his offence. The action against the firm should
only be a financial penalty, unless you can show that the
firm itself directed the individual, and the individual was
acting as an agent of the firm for the purpose of doing this.
That is the whole approach.
(R) Recently the ICAI made certain changes,
bringing the firm in, or the amendments in the
Companies Act, 2013 relating to the liability of the firm
– all of this is becoming more serious for auditors.
I feel it is virtually impossible, I mean it’s like saying
that every time the officer of the company commits an
offence, you can stop the company from doing business,
you can’t do this.
[R] Also Sir, what is your view on the Supreme
Court observations and directions on the operation of
Multinational Accounting Firms (MAF) in India? SC has
directed the Institute to take action against MAF who
are acting as surrogates of foreign accounting firms.
What is meant by surrogates?
[R] ICAI in their reports stated that some of firms
operating in India are in violation of foreign investment
norms. Accounting and auditing service is blocked
under GATS.
[G] Some firms have received subsidy from foreign
entities to acquire Indian firms – example was Price
Waterhouse – other example – there is a private
limited company where there is foreign investment,
you have Indian firm – Indian firm is regulated – but
office and staff are same – same visiting card, sharing
the same office, – on paper they are separate, but in
reality, acting as one entity.
No, I personally believe that if you have an Indian firm
and it is a part of the international membership, there is
no harm in a network arrangement, because it is like all
enterprises you work everywhere – work in cooperation,
collaboration, you get synergy out of this. If you do work
here for a foreign company, then you should do it on arm’s
length basis, then you should charge for it. But if a foreign
company or firm does something here indirectly, what it
cannot do directly, then obviously there is an offence.
(G) The Institute has issued letters to all firms who
are members of associations, not even networks.
Firms other than Big 4 – Indian firms who are members
of an association, have also been issued a letter.
I don’t see any difference in them. Having an
arrangement with an international firm, which gives
you access to technology, is no different from having a
company having a technical collaboration agreement with
someone. I do not see any particular reason if you are
paying a royalty to an international firm for using their
name. Then again, you have to see that there is a royalty
agreement which is in place. But if that International firm
has a network here, and you are doing that work on their
behalf, then it is a different situation. So you have to go
on the facts of each case – you cannot generalise the
situation.
(G) Indian Firms expanding overseas: Why has
the Indian accountancy profession not been able to
go global? What do you see as the biggest stumbling
blocks to Indian firms going global?
The question is like this – an Indian firm expanding
overseas would start off with the proposition that you are
an Indian group which is operating outside.
If you have, let’s say, a large number of Indian client
companies / groups having foreign subsidiaries, then
clearly you may need local firms to handle that work.
Suppose, for argument’s sake, you have a company, which
has a subsidiary in Spain. Now, you can either have a local
accountant there in Spain, or if you have a large number of
clients in Spain, you can have a firm there, which has an
affiliation with you, and that firm can do that work for you.
(G) The problem when you talk about collaboration
here is, the Institute does not allow sharing of fees
with non chartered accountants – typically, the ICAI
looks at it this way – a payment of fees to the foreign
firms is regarded as a violation of code of conduct.
I think, there is nothing which prevents you from
subcontracting work to a foreign firm. Sharing of fees
and paying for services are two entirely different things.
Sharing of fees means, the top line you are sharing.
Example, if you get work done from a solicitors firm, if
you get work done from a lawyer – why should you not get
work done from a chartered accountant or an accountant
there. If you are making payment for services rendered,
that is not sharing of fees.
[R] Constraints on Advertisement – Do you feel
that the constraints on advertisement and publicity
on Indian CA firms need to undergo a change, and
to what extent, especially when increasing number
of services can also be rendered by non-CA firms
– like GST or tax work or internal audit – who have
no restriction on advertisement? Do you feel that
such regulations in a competitive environment are
detrimental to the growth of the profession?
I think, perhaps the answer to that is, that you should
have a separate firm doing non-audit services. If you
have a separate firm which is doing non audit services,
then that firm because it is competing with non chartered
accountants should be allowed to advertise, but if you
have the same firm, then the question is that preferably
the names should be different – you cannot have indirectly,
a brand extension.
[R]: But then the ownership…
The ownership can remain the same. Same people
can be partners in both the firms.
[R] The role of ICAI has already been curtailed
significantly – disciplinary action and standard
setting going out. It is today left with education and
registration of members. What is happening and how
do you see its role going forward – will it remain with
these two functions?
See, in fact you have to go back, I don’t know enough
about the present situation. The Institute started as a
regulatory body and an examination body, that is how it
started. Then it developed, it setup a Coaching Board. So,
the core function of the Institute is still there.
Now, the question which arises is the standard setting.
Everywhere in the world, the standard setter is a separate
body. Now, there is no harm in the Institute being an
Accounting Standards Board, but the difficulty, which I
had always pointed out, was we set up an Accounting
Standards Board, and its composition was of the Council
Members plus a few outsiders. The authority of the
Accounting Standards Board was subservient to the
authority of the Council; the standards were issued not
by the Accounting Standards Board, but by the Council.
Now the question is, does the membership of the Council
have the competence to do this? The difficulty is that we
were not willing to shed power and responsibility. If you
had created an Accounting Standards Board, where you
have the right to appoint members for the Accounting
Standards Board, but with a composition which said that
majority of the members would be from outside, that the
chairman of Accounting Standards Board would be an
outside person, that the Board had the authority to issue
standards, and the Council was only concerned with the
procedural part and not the technical part, then you can
have it within; otherwise you can have it outside.That’s
your standard setting function. What happened with the
disciplinary action? The disciplinary action was, and
this again I had been pointing out for a long time; you
had to make a distinction between normal complaints
which were received and information received from the
regulatory bodies.
I will tell you in practice, the stand that we were taking,
in the Reserve Bank. We had a Board of Financial
Supervision, then there was a sub-committee of the
Board, which was called the Audit Committee. Now it’s no longer there. In my time, it was there. The function
of that Audit Committee really was to examine, whether
there was any lapse on the part of the auditor. When an
inspection report brought out that there was something
wrong, and that the NPAs were not properly disclosed,
we would insist on first sending a notice to the auditor, to
see what his explanation was. Then, as an independent
body, we would consider this. And if we were convinced
that there had been a failure, then we would go ahead
and make a complaint to the Institute or inform the
Institute. What does the Institute say- it said No! You
have to make a formal complaint, and if you are to make
a formal complaint, then your people must come and
give evidence, and you must do all that is required of a
complainant. Now, no regulator is willing to do that. After
we made a reference, no action was taken for years. So
what did we do finally? We decided that if we were prima
facie satisfied, we would take action on our own. We
don’t have to wait for the Institute. Now, this was when
the Institute didn’t make a distinction initially between the
matters of public interest, matters of internal obligation,
the independence of the disciplinary committee and its
functioning. These are not some things which happened
today or tomorrow. They happened over a period, and a
bad image was created. As a result of that, you gave an
excuse to the government to take away those functions.
Now you can’t blame the government for doing this.
(R) It is a result of things that have happened over
the years.
Yes.
(R) Do you feel at some point, we should have,
like in some countries, they have multiple Institutes,
meaning there is no one body that will give the
license.
There is only licensing, like that of the Board of Trade
in England, because there are separate Institutes which
exist. I don’t think that would probably come here.
(G): One aspect about image of Chartered
Accountants, which you mentioned. Amongst banks,
the image is quite negative. What do you think needs
to be done now? How does one arrest this problem
going forward? One is, of course zero tolerance
policy you mentioned. What needs to be done now
going forward?
I think it is a long drawn out process, but you have
to build up confidence. The important thing is that
for a profession, what you need, is not the brilliance
of the few, but the competence of the many. You are
holding out that as a member of the profession, your
members have a certain minimum level of competence.
You have to ensure that the competence is there; you
have to ensure that the work is taken by people who have
the ability to discharge that work. But if you are acting
like a politician, where you are trying to please your
voters and get more work for people without ensuring it’s
need or the competence, you are damaging the image of
the profession.
