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Audit thyself

Time to reform accountancy partnerships

Business Standard  |  New Delhi 

In 2002, after being found guilty of having helped Enron doctor its books, Arthur Andersen folded up and the Big Five accounting firms became the Big Four. Although the verdict on Andersen’s role was subsequently reversed by the US Supreme Court, the damage was done and Andersen never returned to business; its businesses, by then, had been bought over by other firms. Contrast this with India, where none of the Big Four — KPMG, Deloitte Touche Tohmatsu, Ernst & Young and Pricewaterhouse — have taken any of the flak for faulty audits. When Global Trust Bank (GTB) ran into trouble, the auditors were accused of negligence and professional misconduct since they had certified the accounts as kosher. While the matter was referred to the Institute of Chartered Accountants of India (ICAI) for disciplinary action, the Reserve Bank of India, for a while, advised banks not to take Pricewaterhouse as an auditor. When the Satyam scandal burst, it turned out Pricewaterhouse was the auditor in question once again, and one of its partners, S Gopalakrishnan, was common to both audits.

Each time such an incident takes place, a series of diversionary tactics surfaces. This is facilitated by the ceiling of 20 partners per accounting firm; so firms which seem to operate under the same umbrella auditing firm are in practice different firms with similar names. If trouble erupts, Pricewaterhouse in one city can quickly distance itself from a firm with the same name in another city — as, in fact, it tried to do. Or, it has been argued, one partner cannot be legally liable for what another partner does. Those involved are happy to see the debate getting deflected. This can and should be corrected, but some of the changes required would mean allowing the Big Four to consolidate their different partnerships. However, the ICAI is dominated by small audit firms that do not want the Big Four to get any bigger.

Now the government is working on whether it will allow the Big Four to set up and establish full-fledged practices in India. This, it is argued, will force them to take full responsibility for GTB/Satyam-type incidents. But this has been made into a reciprocity issue (under the World Trade Organisation), since the Big Four have foreign affiliations and the argument is that Indian accounting firms need to be allowed to practise in other countries as well. Meanwhile, the ICAI has proposed that the Big Four be asked to take on some responsibility for the actions of their partners. If Pricewaterhouse has earned money from Satyam, thanks to Mr Gopalakrishnan, it must take the flak for his actions as well. The ICAI has recommended a ban on the firm for a certain period of time, quite like what RBI did in an informal manner after the GTB case. The argument against this is that other partners of the firm will get hurt even though their audit work has been exemplary.

The ICAI is not blameless, since (like other professional, self-regulating bodies, such as the Medical Council of India) it delays disciplinary action for years. Also, its proposal to compulsorily rotate partners/audit firms every so many years is no solution since acquiring domain knowledge takes firms both time and effort, and large corporations which are comfortable with audits done by the big firms could find that they have run out of experienced auditors of choice. More thinking is required before good solutions can be found.

First Published: Tue, March 23 2010. 00:00 IST