The role of auditors – both domestic and foreign –in banking and corporate deals has come under scrutiny following a series of violations like tax evasion and professional malpractices. The Supreme Court’s directive on a separate law to govern MNC auditors is an eye opener to all that these firms have had it too good for too long. Why else would the top four firms – KPMG, Deloitte, Ernest & Young and PwC – not be subject to parallel audits and scrutiny.
It must be pointed out, though, that this does not concern MNC auditors alone. Even Indian auditing firms have had to face some tough questions for transgression of auditing standards. The story behind these violations is typically worrisome: it is about the shady role being played by the auditing firms in clinching deals between politicians and industrial houses. In this sense they are following in the footsteps of law firms that for long have been active in behind-the-scenes deals with the powers-that-be. Auditing firms not only help companies and high net-worth individuals to dodge tax authorities but have grown big enough to call the shots in high-profile deals and companies’ issues with law enforcing agencies.
The Supreme Court’s recommendation for setting up a three-member panel to consider enacting a separate legislation is something worth considering seriously by the government. MNC auditor PwC has reportedly the lowest code of conduct standards otherwise available for audit firms in India. The global auditing firm has reportedly bungled big time on FDI policy and Foreign Exchange Management Act (FEMA) norms and the Supreme Court has taken cognisance of these violations. As for homegrown chartered accountancy firms, some of them have been known to connive with MNC auditors in perpetuating the fraud that has been seriously analysed by the Supreme Court.
Market regulator Securities and Exchange Board of India (SEBI)’s two-year ban on PwC also highlights the propensity of these auditing firms to defraud investors, shareholders, banks and financial institutions to make illicit profits in terms of collecting fees.
The Supreme Court’s suggestion to bring in the Sarbanes Oxley Act kind of law in India must be seriously considered by law minister Ravi Shankar Prasad. The shady role played by domestic audit and law firms in the Rs 11,400 crore Punjab National Bank (PNB) scam highlights the need for weeding out the scum from the system. Otherwise, none can justify how both internal and external auditors allowed the Letters of Understanding (LOUs) be issued to diamond merchants like Nirav Mode and Mehul Choski without collaterals for over seven years.
Interestingly, the well-known law firm Cyril Amarchand Mangaldas’ role has also come into the open in the multi-billion dollar scam involving the diamond traders that hit the banking industry at its very core. This is an unhappy development because these very professionals have often been heard speaking eloquently against corruption at most industry conferences. They routinely assume the role of financial vigilantes while – according to investigators – indulging in shady deals. It must be remembered that the top managers of these firms are routinely appointed to the boards of blue chip state-run and private companies as independent directors. Unless these white-collar robbers are sought out and made to behave, corporate governance systems would collapse like a pack of cards. These auditors and lawyers should have become the first line of defence for investors, banks and financial institutions in curbing corporate crimes. Cracking down on those masquerading as the country’s conscience keepers should happen immediately and exemplary punishment should be handed to them.