Accounting scandals: Big 4 audit firms face unprecedented crisis in India

The auditors are hitting back, saying there is so much blame on auditors that they are questioning internally whether it makes sense for them to keep auditing Indian companies

The big 4 accounting firms have been facing an unprecedented crisis in India, with multiple investigators looking into their alleged role in concealing losses, related-party transactions, helping erring promoters get away with fund diversion, and even leaking insider information.

Price Waterhouse is awaiting the final Securities Appellate Tribunal (SAT) order on its appeal against Sebi’s two-year auditing ban over its role in the Satyam scam a decade ago. The IL&FS meltdown in August last year also hit its auditors hard. Infibeam Avenues, meanwhile, has called a meeting of its shareholders to remove its auditor for allegedly leaking financial information.

Deloitte Haskins & Sells, IL&FS auditor for a decade, allegedly failed to detect related-party transactions in time. So, strict action, including a ban on it auditing other companies and clawback of fees received from IL&FS, should be taken against the firm, say investigators. Deloitte resigned as an IL&FS auditor after signing accounts for the financial year ended March 2017 amid change in rules mandating rotation of auditors. 

The two other IL&FS and IFIN auditors — EY and KPMG — are also under the scanner, as they audited the companies for the 2017-18 financial year, just before IL&FS started defaulting on its Rs 93,000-crore debt from August 2018 which resulted in potential losses for thousands of small mutual fund unit holders and provident funds.

“It’s a déjà vu for audit firms. Even when Satyam scam had broken out, the role of top auditors had come under question for giving faulty valuation reports on the merger between Maytas and Satyam,” says a lawyer.

The auditors are hitting back. “There is so much blame on auditors that we are questioning internally whether it makes sense to keep auditing Indian companies,” says the head of a leading audit firm who does not wish to be named.

The head of another audit firm said auditors were the “soft target” and no one was asking questions on the role played by the then independent directors and key shareholders who had representations on the IL&FS board. “An auditor will look into the books of a company based on the prevailing information. In the case of IFIN, the Reserve Bank of India gave time until March 2020 to reduce exposure to IL&FS group companies. This was duly reported in the annual reports,” he says. 

Citing an example, the auditor says that Ajay Piramal-owned Piramal Enterprises was ready to take over IL&FS for Rs 750 a share just a few years ago, but the deal was nixed by LIC, which held a 25 per cent stake and wanted Rs 1,100 a share. 

Deloitte, KPMG and EY have already submitted their internal audit papers for IL&FS for the relevant period to the Serious Fraud Investigation Office (SFIO), which is probing the case. An SFIO decision is expected any time, according to a source.

On May 7, corporate India received another shock when Infibeam Avenues accused EY-affiliate SRBC & Co of leaking inside information. The Ahmedabad company called an extraordinary general meeting of shareholders on May 30 to remove the auditor. 

“The company had received an anonymous complaint dated February 26, 2019, alleging that the quarterly financial results of the company had been shared with various third parties, before they were disclosed to stock exchanges, by one of the joint statutory auditors of the company, SRBC & Co, on several occasions,” it said in the EGM notice. Following its own investigation, the audit firm had confirmed that there was a breach and the email leaking financial results was deleted. The board, therefore, recommended shareholders to remove the auditor, adding that the auditor had refused to indemnify the company in this regard. The auditor, meanwhile, also specified that it was not in violation of any applicable law, and there had not been any wilful fraudulent act on its part. It also denied any wrongdoing, the notice said.

“Leakage of financial information before a board meeting to outsiders is quite common in India,” said a top official of an investigating agency. “In this regard, we are investigating several companies, including some top brokers and companies in which brokers have direct stake,” he said, asking not to be named.