Citizens' Issues
Whither quality audit in India?

When US-based SEC can demand change of auditors or re-audit, why can not the Indian stakeholders and/or regulators do the same with greater vigour?

Three independent adverse press reports have recently appeared on three big names in the Indian corporate world—State Bank of India (SBI), Wipro and Sesa Goa. All point to the quality of the audit process.  


Following the Satyam fiasco these reports should sound as second wake up calls for the audit profession and the regulators—the Institute of Chartered Accountants of India for the audit profession, Securities and Exchange Board of India (SEBI) for corporates and the Reserve Bank of India (RBI) for the banks.


When SEBI failed to act, the Competition Commission of India (CCI) stepped in to fine the National Stock Exchange (NSE) Rs55crore for “abuse of dominant position”. This speaks of the extent which our regulators go.   


The Hindu Business Line had a front page headline—“RBI finds deviations in SBI bridge loans to telecom cos”. The report goes on—“Unicor was sanctioned a bridge loan of Rs2,500 crore without identifying any financial institution for part-financing capital expenditure pending long-term project finance tie-up, neither was there any committed financial tie-up at disbursement in February 2009 when they ought to have completed the roll-out within a year of getting the licence by February 2009. A year later a regular term loan of Rs9,475 crore was sanctioned for the entire project, including Rs2,850 crore to replace the earlier bridge loan when there was no committed tie-up in place. Rs6,625 crore was not released, but the bridge loan rolled out till December 2010”.


Similar bridge loans/bank guarantees extended to Loop Telecom-Rs725 crore, Datacom Solutions- Rs1,100 crore, Swan/Etisalat-Rs395 crore were either adjusted against a regular loans extended later or rolled over. Reliance Communication was sanctioned an unsecured corporate loan of Rs.2, 500cr for capex without any assessment of credit requirements even when the unsecured loans on that scale were simply not permitted. The banks are subjected to a plethora of audits—Concurrent and Inspection, Revenue, Branch and Statutory Audits. Additionally they have Chartered Accountants on their boards of directors, ostensibly monitoring, too.


The second page Business Line has another report—“SEC asks Wipro to prove its auditor KPMG India is independent”.  Failure to do so, Wipro may have to appoint new auditors or get its business books re-audited. This was following the detection of embezzlement of Rs32 crore.


The Free Press Journal reports that the ministry for corporate affairs’ Serious Frauds Investigation Office (SFIO) has recommended prosecution of Sesa Goa on nine counts for over-invoicing of imports by Rs14.6 crore, sales by Rs.42.51 crore and under-invoicing of exports by Rs 1, 200 crore and excess payment of agency commission of Rs40.6 crore. The SFIO also accused the company’s independent directors and statutory auditors for not co-operating and recommended their prosecution.


These major misdemeanours on the part of the companies’ professional independent directors, quite a few generally CAs, heading the Audit Committees, leading up to their dereliction of duties as much as on the part of their Statutory  Auditors does not augur well for corporate governance.


The US SEC (Securities and Exchange Commission) appointed Public Company Accounting Oversight Board/PCAOB, conducts inspections and publishes a portion of each report. A portion of its contents dealing with discussion of potential defects in the audit firm’s system of quality control remains non-public if the auditor addresses them to SEC’s satisfaction but failure to satisfactorily address the matters within twelve months they are made public. The Sarbanes Oxley Act (SOX) in the US has imposed internal control review requirements on auditees as well as registration and quality control reviews on their auditors.


In India we have yet to see the likes of either the PCAOB or SOX. Our new Companies Bill is being tossed up and down for years now with the Indian accounting regulator, the ICAI, pussy footing, the minister for corporate affairs tearing his hair in anger. Here we have a Peer Review mechanism for the review of the Auditors’ papers by another firm of CAs. So far nothing has come in the public domain of any adverse observations, if any, reported.


The Reports of the PCAOB as well as Peer Review of Satyam’s Audit as of the four need to be immediately put on the ICAI website, to lend credence to the quality of audit processes and procedures. The institute’s statements on practices, standards, guidelines, et al, notwithstanding.


The Satyam saga has brought out numerous skeletons now added thereto Wipro with a Rs32 crore fraud, the banks in the telecom companies as well over exposing their advancing norms by granting lines of credit to RIL, ONGC, BHEL and IOC.


The actions, if any, initiated by the three regulators—the ICAI, SEBI and RBI—needs to be put up in the public domain by each of them to satisfy the Indian nation that they are not silent barking watch dogs but active blood hounds with teeth.


The SEC fined the auditors of Satyam millions of dollars in the US for audit deficiencies in India, the Indian regulators here owe an explanation as to why action is not initiated more particularly when the CBI has enough of damaging facts on the Satyam audit.


The actual unabridged reports need to be put up on the ICAI and/or MCA and/or SEBI websites to enable the stakeholders to take a call on the overall quality of audit for which crores of rupees they get paid as audit fees for which the auditors furnish a very guarded Auditor’s Report when all that they report on is neither true nor fair, nor fairly true or fair nor neither!


 When US-based SEC can demand change of auditors or re-audit, why can not the Indian stakeholders and/or regulators do the same with greater vigour?


(Nagesh Kini is a chartered accountant with a long stint of audit exposure.  He is now an activist.)



MK Gupta

4 years ago

In West Bengal, as regards the coop banks, coop societies, chit funds, etc., there is neither any regulator nor any system of audit by the CAs. It is a society free of any audit whatsoever--it is all a club culture, like mutual enjoyment societies.

Mrs Kokila Mani

4 years ago

Making the statutory audit in India is a mere farce. The cooperative 'Speed Audit' Programme launched in last year in Kerala Cooperative auditors found that the programme was launched without issuing any

circulars or orders. In just three months’ time, audit pending from 2008 to 2011 were completed to make it current. Some of them expressed concern that after completing the auditing for the 2011-12 period. Many of them would become jobless. As of now, their salaries, perks, pension contributions and even leave surrender benefits are paid by the PACS, a provision strongly objected to by the financially ailing societies.
The government initiative to conduct speed audit

was against the very concept of auditing. They are now mooting audit by Chartered Accountants as a step ahead of implementing the Central Act as per Vaidyanathan Commission recommendation,
If Chartered Accountants are engaged they will be looking for the arithmetical accuracy.
Could something be done in just one or two months!
The end result was the ratification of all illegal
and corrupt activities by PACS director boards and


4 years ago

Statutory audit is a farce in India. It is only in rarest of rare cases that tiny auditors seek to raise very valid issues while conducting branch audits of Banks and PSUs, but their voice is hushed up under pressure inter alia by giving them very little time to perform their duties and indirectly by regulating their remuneration citing rules. Even the audits of monolithic huge corporates are awarded as prizes and favours and hence the auditors always tend to bend backwards to accommodate the client by overlooking blatant incidents of mismanagement of finances. PSUs'audits are also like this and the upright auditors are usually punished. There is no serious and honest auditing ever in India, otherwise the IT Deptt would not be disallowing claims/adding back huge amounts to declared incomes opf big firms. And there are huge "groups"(some of which are very much in the news) who dodge audit and the tax deptt or SEBI and other regulators with impunity. Except the CAG who has of late become proactive and very alert, the regulators hardly care what sort of audit reports are made. There should be provision for punitive action against audit firms auditing corporates, etc., under the varous Acts like the Income Tax, etc. The ICAI is no more an epitome of integrity as would be clear from the recent disputes relating to elections to its central council and land acquisition matters. It is all a matter of controlling interest--let auditing go to hell !

RTI Judgement Series: Food and Supplies Department corrects actions after RTI is filed

An RTI application led to proper re-examination of the actions of the Food and Supplies Department of the GNCTD in allotting licenses for kerosene oil depots. This is the 65th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application

The Central Information Commission (CIC), while disposing an appeal, appreciated the fact that the Food and Supplies Department of the Government of National Capital Territory of Delhi (GNCTD) corrected its mistakes and adopting its policy properly.


While giving this important judgement on 10 September 2009, Shailesh Gandhi, the then Central Information Commissioner said, “...the Right to Information (RTI) application led to proper re-examination of the actions of the department in allotting kerosene oil depot licenses. The order by the assistant commissioner (East) appears to admit that the high court’s order has not been implemented properly earlier.”


Delhi resident Krisha Gupta, on 15 October 2009, sought information about policy for allotting kerosene depots to unemployed graduates from the Food and Supplies Department of the GNCTD.


He sought information on six points regarding copy of order by which preferences was given to unemployed graduates and according to the reply of FSO, copy of govt. order by which this policy had been discontinued, reasons for not listing the appellant’s application in the scrutiny list dated 8 February 2008, deficiencies in his application as per the check list, under which rules/law application form of Anjana Goyal were found legal or illegal and so on.


On 20 November 2009, the PIO sent his reply stating that...
1.     A) This is concerned with HQ (policy) Since concerned information was provided by  
Policy Branch.
        B) It is concerned with HQ.

          C) It is a decision given by the Food & Supply Commissioner.



2.       A) It is concerned with departmental process.

          B) -do-

          C) -do-


3. All concerned certificates/documents were presented before screening committee/selection board on which decision made by the committee/board. An explanation of the reason and bases of the decision made the committee cannot be done.


4.       (A)     It is the decision of the board/committee.

          (B)     -do-


5.       (A)     -do-

          (B)     -do-

(A) Due to remand of the CIC, there was to make decision after hearing Krisha Gupta   

(appellant) because the appellant was not heard on 20 February 2009.

          (B)     -do-

          (C)     It is the decision made by chairman (Selection Board).

          (D)    It is related departmental procedures.

          (E)     -do-            

          (F)     -do-

          (G)    -do-


Not satisfied with the reply, Gupta then filed his first appeal. The First Appellate Authority (FAA) gave an order on 14 January 2010, in which he stated...


“The appellant states that the Commissioner (F & S) (CFS) has himself stated in his order that preference can be given by order dated 25 September 2008. However, on reading the order it is the point No 3, whether an unemployed graduate can be given a preferential treatment in this case or not?


“The appellant has shown copy of Form No. A, wherein 2(d) is also notified for the information that other things being equal, preference will be given to the applicants belonging to (a), (b), (c), (d), unemployed graduate can be given a preferential treatment in this case or not.


“On character certificate, the appellant has shown a checklist, required at Serial No 4: Character Certificate from a gazetted officer, a copy of which is available with the appellant. The appellant states that there was an amendment as mentioned in the PGC order dated 17 September 2009. The appellant has shown a copy of the order available with him. Hence, Information has been provided to him.


“Now, the Selection Board in its minutes of meeting on 20 February 2009 has stated in para-2 to submit character certificate from two reputed persons of the locality. A copy of the minutes has been provided to the appellant by the department.


The vacancy was mentioned before the Delhi High Court. He has shown the order of Delhi High Court dated 13 December 2004, the appeal order of SS Rathore, No6/2008 stating that there is no requirement of notification of vacancy as the kerosene oil depot (KOD) one for more in excess of the numbers of cards. This was overruled by the CFS by order dated 23 September 2008.”


Gupta then filed his second appeal before the CIC.


During the hearing, Mr Gandhi, the then CIC, said Gupta had sent a letter to the Commission on 7 May 2010 stating that he received the information. Gupta further stated that the department has now adopted its policy properly.


“The papers attached by him show that the RTI application led to proper re-examination of the actions of the department in allotting kerosene oil depot licenses and the order by the Assistant Commission (East) appears to admit that the high court order had not been implemented properly earlier. The Commission records its appreciation of the fact that it appears the department has corrected its mistake on its own,” Mr Gandhi said.


He then disposed off the appeal.




Decision No. CIC/SG/A/2010/000777/7776

Appeal No. CIC/SG/A/2010//000777


Appellant                                  : Krisha Gupta,



Respondent                              : Anil Kaushal

                                                   APIO & FSO

                                                   O/o the Asst Commissioner, (East District),

                                                  Food, Supplies & Consumer Affairs,

                                                  Govt of NCT of Delhi,

                                                  DDA Complex,

                                                  Dayanand Vihar, Delhi-110092


A wake up call from Cyprus for “debt-ridden” states like Kerala

The Cyprus shock gives us an opportunity to trim our ambitions and tailor our projects and programmes in such a way as to harmonise them with resource availability. Taking a lesson, Kerala should also review its half-baked investment ideas that are being pushed through by the neo-rich and non-resident Keralites and stop taking guidance from arm-hair economists

Cyprus is a small country with a population less than 10 lakh and geographical area less than one-fourth of Kerala. The country with almost 100% literacy, life expectancy at 79 years and a per capita income of over $28,000 in 2012 (today’s position will be assessed by analysts in due course!) must be having a comfortable position in various human development indicators. Despite all this, Cyprus has recently attracted media attention for failure of its financial sector needing a ‘bailout’ involving $13 billion jointly supported by the European Union, the European Central bank and the International Monetary Fund. The pre-bailout days saw the failure of Cypriot financial sector sending shock waves to global markets and even Indian stocks sliding in a sympathetic vibration mode.


The cause of the failure of the Cypriot economy is attributed to unbridled functioning of banks in the country, not following prudential norms, offering interest rates on deposits (mainly accepted from Russian depositors) which were unrelated to return on investments and heavy dependence on external assistance for survival in times of crisis. The conditions of present bailout package announced on 25 March 2013 include:

•  Splitting the Popular Bank of Cyprus (also known as Laiki) into a good bank and a bad bank. The bad bank will be closed in due course.

•  The good bank will be merged with Bank of Cyprus (BoC).

•  BoC will be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. Simply put, major portion of large-size deposits which are not covered by insurance will become “non-refundable” in nature.

•  The conversion will aim at a capital ratio of 9% after implementation of the programme. The programme (bailout) money will not be used to recapitalize Laiki and BoC.


The Cyprus shock gives us an opportunity to trim our ambitions and tailor our projects and programmes in such a way as to harmonise them with resource availability. Cyprus suffered from an over-sized banking sector some eight times the size the country needed.


Taking a lesson from the failure of this country despite several positive factors in its favour, Kerala should review its ambitious projects involving massive investments dependent on borrowing and investments from outside.


 “God’s own country” (That is how the state’s tourism department is marketing Kerala in the international tourism market!) is going through a crisis, on almost all fronts. No. I am not referring to the sex scandals rocking the state assembly or the nasty outbursts by the leaders of various political parties or the weekly hartals and bandhs, which routinely affect the normal life in the state. People of Kerala take all these in their stride and have by now, learnt to live with them. After assumption of office nearly two years back, chief minister Oomen Chandy did not go to bed even on a single day with an undisturbed mind. This is on the assumption that his mind gets disturbed for things normally bothering ordinary human beings.


The last straw is the Comptroller and Auditor General of India’s (CAG) report on the state finances for the year ended 31 March 2012, presented to the state assembly on 18 February 2013. The increasing revenue and fiscal deficits and resultant growing fiscal imbalance were highlighted in the CAG report on the state finances for the year ended March 2012. Adverse features in the report included, among others:

  • Increase in the ratio of revenue deficit to fiscal deficit indicating the use of borrowed funds, largely for meeting current expenditure.
  • Disturbing maturity profile of debt. The state will have to repay 49.6% of debt during the next one to seven years.
  • Dwindling net availability of funds from borrowing, since a large chunk goes to debt servicing. During 2011-12, out of Rs8, 880 crore borrowed from the market, only Rs4, 426 crore was left after servicing debt. Even out of this a sizeable portion went for non-developmental purposes.
  • The average annual return on state’s investments aggregating Rs 4,206.43 crore in statutory corporations, own companies and cooperatives was 1.3% during the last five years.
  • Revenue expenditure which recorded a steep growth of 32.83% during 2011-12, accounted for 90.47% of the total estimated expenditure of Rs50, 896 crore. 70% of revenue expenditure was accounted by salaries, wages, pension, interest and subsidies.
  • Capital expenditure in absolute terms was a meagre Rs3,853 crore accounting for 8% of the total expenditure of the state. 


These observations, howsoever well-founded they might be, will be brushed aside by the combination of varying selfish-interests, which are these days coming together with the single agenda of staying in power and ‘sharing’ the benefits of power, as views of an auditor who should be checking the accuracy in figures rather than bothering about or suggesting how a government should manage the country’s/ state’s resources. The limited purpose of quoting CAG’s observations at the outset is to draw attention to the state of the state’s finances, which is relevant in the context of the discussion that follows.


Kerala, though the state came into being only in 1957, had the benefit of tasting the benefits of being governed by governments representing different permutations and combinations of different political and economic interests and periodic change in the ruling front, which has been a much later development at the Centre and in many other states. Thus, at least till the emergence of LPG (Liberalisation-Privatisation-Globalisation) politics. I differ with the economists who say that this LPG had more to do with economic development rather than politics—circa 1991—and usurping of power at the Centre by BPL (Businessmen-Politicians-Lawyers) combine—circa 2001. Kerala enjoyed the best of both the worlds namely a sprinkling of socialist ideology in policy formulation and capitalist practices in governance.


Kerala’s Sastra Sahitya Parishad, around 2002-04, did make some in-depth study on ‘How Kerala lives?’ and ‘How Kerala thinks?’ (Kerala padhanam—2006) and come out with some interesting revelations. By the time the Parishad team carried out the field study, the “Kerala Model” which had been by then received world acclaim had started showing signs of disintegration and was fading. At this stage, it would be worthwhile to recount the positives of “Kerala Model” briefly:

  • The underlying merit of the model was the fact that despite the relatively low income levels which did not show signs of rapid growth, there was perceivable improvement in human development indicators, especially when the comparison is with people in other geographical regions of India.
  • The focus and emphasis on equity and social justice acted as a catalyst for the state’s development experience.
  • The social leadership provided by leaders like Srinarayana Guru whose approach was humane, made the follow-up work easy for the Communist Party which gave economic and political dimensions to the thought process which was already embedded in the minds of the majority.
  • The revolutionary changes in land reforms and education initiated by the first Communist Ministry in Kerala was the continuation of a process, seeds of which had already been sown by an enlightened religious and social leadership. The leftist influence continued to dominate the state’s development process during the first four decades of the state’s existence.
  • Some of the longstanding results of these policies included lowering birth rate, reducing infant mortality, improving nutrition-availability for children, achieving almost 100% literacy level. An unwritten wage policy that ensured a much higher wage level for skilled and unskilled workers and  visible improvement in some of the crucial human development indicators in the state. Sometime last year, the RBI governor who visited Kochi, during his morning walk found daily wage workers from Andhra Pradesh on the street, who told him that they were paid about Rs600 per day and were able to save and send home ‘something’.


These commendable achievements are shadowed by near anarchy on the labour front, which has affected industrial progress and political instability. This resulted in assortments of political parties, with not much in common in terms of ideology except the greed to hang on to power, coming together to form alternating LDF (Left Democratic Front) and UDF (United Democratic Front) combinations governments after each election in the state.  This situation has resulted in governance being hijacked by vested interests within the state and outside, many a time, through inefficient and lazy leaderships of small political parties gaining more than their reasonable share of ‘responsibilities’(say, based on votes polled or number of legislators in the state assembly ) in the government of the day. When survival of the government is dependent on a couple of MLAs “not crossing the floor”, the ruling front compromises several democratic principles of governance. Much on the same way as Dr Manmohan Singh is carrying on at the Centre.


Historians will not pardon the political leadership of Kerala for messing up and destroying the gains and advances made during the closing years of the decade 1950s (Kerala came into being on 1 November 1957) by the governments which ruled the state from the formation of the state and successive couple of governments that followed. The choice of ministers by EMS Namboodiripad who was the first chief minister needs special mention. Ministers in the first cabinet like C Achutha Menon, VR Krishna Iyer and Joseph Mundassery brought glory to the first ministry by initiating far-reaching reforms in their respective areas of responsibility.


Last two years have seen policy prescriptions from several pressure groups influencing the approach of the Oomen Chandy government in several areas of the state’s economic development. Half-baked ideas for investment in industry, infrastructure and other development areas are pushed through by the neo-rich within the state, investing NRKs (Non-Resident Keralites) and arm-chair economists now guiding the state government. ‘Festivals’ like Emerging Kerala, conferences of NRKs and interactions with NRKs by state leaders when they visit countries like the UAE give an impression that the state is ripe to be transformed into another Dubai. When majority of the schools, hospitals, poverty alleviation programs, drought relief, unmanned level crossings on rail tracks, under-developed roads linking interiors of the state with towns, bridges, agriculture and so on wait for small allocations for years, the state government commits huge funds which involves long-term external borrowings for projects like Kochi Metro (Rs4,500 crore, with state and central participation), Trivandrum Metro (projected cost Rs5,100 crore), Calicut Metro (Rs4,500 crore) and several new airports. PPP (public-Private-Partnership) or attracting private investment from external sources have the inherent danger of leading the state into a debt trap which has been avoided because of the foresight shown by planners till the late 1990s.


Self-reliance is not a bad idea. Neither is borrowing for productive purposes. But, leaving everything to market forces or taking a short-term view of long-term liabilities may take the state into an irretrievably deep debt-trap. Sooner the state approaches planning with the seriousness the governments in the state perceived finances and economic development during the initial years of planning, the better for God’s Own Country!


Other stories by MG warrier


 (M G Warrier is a freelancer based in Thiruvananthapuram.)



Jagdish Balakrishnan

1 year ago

Very interesting article...

Thomas Kuruvilla

4 years ago

An interesting article. As a Malayalee I have always been concerned about the growth of Kerala economically, even though I have resided outside Kerala all my life. The lack of industrialisation has been an area of great concern. I'm not an economist & do not know how the state can come out of the stagnant growth which it is encountering. I have always felt that there is a limit beyond which labour laws should stop protecting unfruitful and/or disruptive labour. Industries cannot prosper in a climate where the laws are against investment & where laws protect labour unrest to any extent.

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