Chowkidar or Chor? Is the Party Over for the Once Powerful?
Infrastructure Leasing and Financial Services Ltd (IL&FS), Dewan Housing Finance Corporation Ltd (DHFL), Reliance Capital Ltd and YES Bank, though a dozen more can be rightfully tagged to this ‘big-4’, cumulatively caused anywhere between Rs1 lakh crore and Rs1 lakh fifty thousand crore loss to their lenders, investors in debenture and preference shares and public deposit-holders, in the space of less than two years.
IL&FS was the first off the block in 2018, closely tailed by YES Bank, DHFL and Reliance Capital. 
In each of these cases, the reason for the enterprise going under had little to do with any extraneous shock or challenge. All the four saw the promoter or the top echelon swindle and divert funds which was belatedly picked up after the horses had fled the stables.   
A common factor that glues these four is that all of them boasted of being serviced by one of the Big-4 audit firms!
Until each of the scams broke out, there was not the slightest whiff of any impending crisis; the audit reports were clean as a whistle!
As a sample of the extent of the accounting frauds, which these auditors blessed with no qualms, the result of the restatement of accounts of the IL&FS companies reported by the Times of India on 6 May 2024 is a handy reference. 
The chart above shows the extent of the divergence between the reported profits in the three companies listed above and the actual figure that should have been reported if the books were duly kept and audited! 
While the details of the break up may have to be gone into to assess the causes and reasons for the misreporting, it is difficult to pass this as a case of oversight or clerical error!
As noted in the opening paragraph, all these instances were cases of calculated and cavalier plunder by the top management or the promoters and conveniently overlooked by the auditors, maybe in active connivance.
In the period prior to the advent of the national financial reporting authority (NFRA), there was practically little effort to probe the shortcomings in the work of the auditors.
Only when a case like that of Satyam Computer Services broke out, where the promoter confessed to printing the bank fixed deposit receipts (FDRs) on his desktop, which directly compromised the integrity of the audit process, did it lead to an outcry and fast action, followed by the punishment of the auditor.
It is NFRA that has been able to surface serious compromises in the independence of the auditors in many instances and the shortcomings in the quality of the work performed have led to the outcomes illustrated above.
Whether the auditors actively colluded, as suspected in some cases, or they were blind-sighted to the shenanigans of the management, the inadequacy of audit as a means of invigilation on companies has been painfully brought home.
When the debentures of DHFL, the market-linked debentures (MLDs) of Reliance Capital, or the preference shares of IL&FS were hawked to the high net-worth individuals (HNI) community, the name of the auditor was prominently displayed as a comfort factor! 
The auditor(s) concerned may feign ignorance of such instances. But the fact is that the typical investor community is the one that, in some capacity or the other, interacts with such firms as a client or otherwise and assumes that the presence of such names as auditors is an assurance of the integrity of the bookkeeping. Many serving and former partners of the big firms had themselves invested in these cases!
Audit frauds and accounting scandals are a universal phenomenon and it is difficult to pinpoint if any particular country does better or worse on this score. The incentive to commit fraud is economically higher in bigger companies, and these tend to be audited by one or the other of the big audit firms, if not just the Big-4.
The one such to explode recently is in the US, where the Securities and Exchange Commission (SEC), just a week back, charged BF Borgers, ranked within the top-10 firms there, of serious fraud in its audit of the SEC registrants, of which Trump Media is a noted name! 
BF Borgers has been found to have doctored the documents prepared during the course of its audits as evidence for the work done and, in many cases, the work papers of the previous years’ audits were slipped into the later audit, with dates suitably changed.
The firm was also found to lack the level of manpower and resources necessary to audit the number of SEC registrants it did.
The firm has been fined US$12mn (million), and the partner, Borgers, US$2mn. The firm is banned from auditing SEC registrants.
The entire exercise concluded in less than a year, and the period of investigation covered the SEC filings made between 2021 and 2023. 
Hot on the heels of the SEC’s castigation of BF Borgers last week, the Financial Reporting Council in the UK has released a 450-page report on the biggest audit scandal in that country that led to the collapse of a 5bn (billion) pound construction company, Carillion.
KPMG was the defaulting auditor in this instance, which copped a 21mn pound fine last October, and two of its partners were each fined and banned from doing audits for some years.
The full investigation report, which is now available and reported in the UK media extensively, reveals the dark patches in the audit process of such a large corporation and the complete lack of sincerity and purpose to perform the required role of verification of the books and independently report the findings.
The audit partners not only failed to exercise adequate diligence, but they were found to be outright negligent and collusive with the top management of the company to find solutions to artificially boost the revenue from certain contracts.
The true quality of an auditor to challenge the positions taken by the management and exercise adequate scepticism in their work was missing and, shockingly, the working papers were altered and doctored to reflect as if certain checks that were not performed during the work were being shown as duly done.
The long, hard and extensive digging of the files and documents by the FRC has been duly documented for the benefit of those wishing to understand the true extent of the malaise in the audit profession, which, given the oligopolistic status of just four firms dominating the field, needs a complete overhaul in all parts of the world. 
The key difference between the system in the US or UK and India is that the investigation in those countries is swift, the punishment severe, and seldom does a court interfere by giving a stay. Investigation into such accounting scandals stays with the specialist agencies designed to handle this.
The independence and the rigour of the process actually lead to the accused agreeing to the punishment so that they are more leniently dealt with! In India, at every stage, the matters are litigated and the system actually puts a premium on dodgy conduct rather than a swift resolution.
Another instance when a Big-4 firm came woefully short on integrity is in Australia. PwC, Australia, was caught in a major fraud of leaking privileged government secrets on taxation proposals to its counterparts in other parts of the world.
The matter has been under investigation, and the latest report of the senate standing committee of the Australian parliament makes for a damning reading of the conduct of the said firm during the course of the investigation, even after being hauled over the Australian coals for its greed of cashing government secrets! 
Some of the extracts from the second interim report published a month back, as reported in the Australian press, are a big black mark for the firm across the world!
Reverting to the situation at home, the relationship between the big firms, euphemistically called multinational accounting firms (MAF), and the Institute of Chartered Accountants of India (ICAI) has been in the best of times that of a mother-in-law in rage and a combative daughter-in-law!
The latest salvo fired a few days back by ICAI at one of the four-member or affiliate firms of Ernst & Young (EY) marks a key turning point in the regulatory scrutiny of the conduct and way of working of the big firms that are part of a global network like PwC, KPMG, EY and Deloitte. 
While the affected entities have obtained a stay from the Delhi High Court, ICAI is said to be cross with the government in not curbing the Big-4 and a few similar firms with international affiliations from gaining out of the sharing of technology, resources and business referrals from their global network which skews the competition with the local counterparts.
The local accounting firms are a splintered and scattered lot, with Subramaniam, Singhi and Sohrab not knowing how to combine and make a bigger firm as their problem is which ‘S’ should stand first in the name of the new firm and who gets to sit in the bigger room with an attached toilet!
In a recent press interaction, the honcho of the ICAI shared the data on the number of CA firms in the country. “At present, there are about 96,000 CA firms in India. Of these, 75,000 firms are proprietorships and are small and medium-sized. Another 24,000 firms are partnerships with 2 to 100 partners. Of these, about 400 firms have 10 partners or more.”
Leaving aside the minor arithmetical inaccuracy in the above quotation, the situation is that there are CAs and CAs everywhere in the country, but not enough to shed their ego and make a big desi firm!
Prime minister Narendra Modi had in July 2017 in his address on Chartered Accountants Day, said-
The time frame set by the PM has come and gone! Like a few other dreams going awry, the position seems to be skewed more in favour of the Big-4 firms over time, as the data on the right shows. 
With more of the listed entities using their services, the data is hardly conducive to bringing down the BP of the council members of ICAI, who often get voted to the posts like politicians, promising the moon to their constituencies! 
Even the government tenders seem to favour size and global credentials, thereby keeping the local firms out. 
While that may be the better means to get quality services, it does not promote dreamt by the PM!
If ICAI considers itself accountable, it should list the efforts taken in the seven years since the PM spoke of his dream. Since there seems to be little in the law to come in the way of the professionals forming themselves into bigger firms that rival the manpower and resources of the big firms, why are not CAs merging their firms to make bigger outfits? 
The smaller firms, often like most political parties, pass the baton within the family rather than co-opt better talent from outside.
Bigger firms have a better corporate culture, though they are not entirely free of nepotism.
Is the Big-4 staring down the barrel with their continued poor record across the globe of putting financial gains above being the dependable chowkidar for the investors, leading to an ultimate crisis of confidence and probable regulatory actions to end their dominance? 
So much bad press going around, with a hole as big as a Jharkhand coal mine in the accounts originally audited by different Big-4 firms that have been since recast in IL&FS cases, can the image of these much-vaunted villains get more dented than it is now?
(Ranganathan V  is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
1 month ago
Whatever Technology is available in this age, there is no way to predict or compute the fraud committed by the firms and auditors hand in glove with it. This is futile. Most scandals take place for years and general public gets to know when it breaks out leaving the retail investor with a begging bowl.
1 month ago
our rating agencies and auditing firms need to be more vigilant and not be a party to the organisation since they are paying them and govt should also take these agencies to task and ban them for the next 7 yrs so that some kind of credibility comes into this.Otherwise so many retail investors hard earned money and banks money which is nothing but public money is put to fraudulent usage
1 month ago
Bigger the name bigger the fraud, br it corporate or be it the auditors.
1 month ago
Excellent and Balanced article.
1 month ago
I suggest that all listed companies with a balance sheet size of Rs 1000 Cr and above or turnover of Rs 1000 Cr and above shall be audited by the C&AG empanelled auditors. Surprisingly the Big 4 is not empanelled by C&AG or even for the audits of PSBs, perhaps indicating that there is no level playing field for Indian firms and MNC firms.
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