Friday, Dec 08, 2023

How They Make The Ledger Lie

How They Make The Ledger Lie

Hole-in-the-wall accountants, Tier-2 CA firms and the Big Four—all share a professional DNA of trickery. From there, it’s a tiny step to fraud. In the case of foreign firms, their very presence in India hinges on that.

How They Make The Ledger Lie How They Make The Ledger Lie

The financially illiterate middle class may encounter chartered acc­ountants around the dreaded season of tax returns—as the self-pitying definition goes, they are people we pay to tell us if we are broke and by how much. Auditors are higher up the angels’ hierarchy, known only to businesses. The Hollywood caricature is of a bald head crowned with a visor, shirt-sleeves rolled up, digging into dusty, oversized registers, poring over data, crunching numbers, reading complex financial gobbledygook—the things that make many shudder is routine, even exciting, for these certified practitioners of a modern black art.

But how and why does it matter to us…what these hifalutin professionals get up to in their day jobs? Especially in their role as ‘statutory auditors’—as defined by comp­any laws—for big, medium and small corporations? Because it does. Because, as stockmarket regulator SEBI (Securities and Exchange Board of India) explained in the 2009 Satyam case, auditors have a “direct, fiduciary” relationship—that is, one of trust—with the shareholders of the companies they audit. India has over three crore retail investors, and not only do they depend on the auditors to certify the internal health of companies, the auditors are supposed to work on their behalf.

Beyond that internal realm, the financial fate and trajectory of these companies can have larger implications on the economy. Remember only the “window-dressing” offered by top-notch auditors to Lehman Brothers before its collapse plunged the global economy into its worst recession since the 1930s—and the pain suffered by millions of people.

Not all effects are that spectacular: a lot more things happen in the routine sphere. The big global companies are one end of the spectrum, their shenanigans well-recorded. At the other is an equally omnipresent, silently malign force that largely flies under the radar: the homegrown variety. What the friendly neighbourhood CA wreaks—if you add up all the friendly neighbourhood CAs—is nothing short of a haemorrhage. Investigations have shown how CAs help launder money for their clients. In the recent past, the CBI has booked at least eight CAs for pilfering bank loans through shell companies. In one case, the agency found Mahua TV had siphoned funds from a Rs 3,000 crore loan, using 98 shell companies (95 of them Calcutta-based)—all with the help of CAs. Altogether, till this March, 339 such shell companies had been uncovered by the CBI.

“These CAs controlled these suitcase companies themselves, even operated their bank acc­ounts. They would generate fraudulent paperwork and pass money through the accounts of these different companies while showing a loss in the books of the borrowing entity, one of which was Mahua, a news media company that catered mainly to Bihar-Jharkhand,” says a CBI official.

The amounts involved can be staggering. In a recent case, the Enforcement Directorate (ED) filed a chargesheet against a chartered accountant on allegations of laundering Rs 8,000-crore through 90 shell companies. A month ago, Nilesh S. Vikamsey, president of the Institute of Chartered Accountants of India (ICAI), the statutory regulator, posted a message on the ICAI website saying its disciplinary board had taken action against four CAs for enabling money-laundering.

The Serious Fraud Investigation Office (SFIO) had probed a racket allegedly run by a CA, Rakesh Agrawal, whom the ED arrested this May. The agencies suspect Agrawal was laundering cash for several high-profile individuals. Information has been revealed about only one of his clients—Misa Bharati, daughter of Laloo Prasad Yadav. The ED has alleged that the CA helped Misa and her husband launder money through shell companies and had also raided their farmhouses in Delhi.

The SFIO—which has an overarching supervisory role across the corporate world—also shared an investigation report with the ICAI on the role of 34 accountants who had helped launder cash through shell companies. An ICAI spokesperson says the regulator found eight of them were not even CAs and is currently probing the role of the remaining 26, who are CAs. All this flurry of activity, though, may mask the fact that the regulatory eye has been rather too lax. The ICAI had penalised only 25 chartered accountants in 11 years (as Prime Minister Modi pointed out in a speech on July 1)—before that number jumped to 402 by March this year. In many cases, though, the ‘disciplined’ CAs managed to get relief from courts (often with no challenge).

The higher realm of big auditing firms seemingly moves to a more refined, institutional rhythm—till things crack and the light comes in. As former Delhi High Court Chief Justice A.P. Shah recently pointed out, auditors (and often the same firms as consultants) certify documents that help bag contracts which use up subsidies, export incentives, grants, a share of government revenue and taxes and of profits in PPP projects.

The Satyam case is where the auditors, famously, made a mess (and some of the individuals paid the price too). But we saw a wilful repeat of the same series of missteps by the same auditor (and, later, another multinational auditing firm) in the Vijay Mallya/Uni­ted Spirits Ltd (USL) cases. This organisation—PricewaterhouseCoopers (PwC)—also works as consultants on several projects where public money and projects are involved. Its audit firms are collectively called PW India and the consultancy arm PwC.

Two Big Falls

Former Satyam chairman Ramalinga Raju (left); Vijay Mallya, former USL chairman

Photographs by PTI, AP

The name PwC evokes a valued, competent, old brand of CAs, auditors, tax advisors and financial consultants. Classified as one of the Big Four—with Deloitte Touche, Ernst & Young (EY) and KPMG—PwC legally describes itself as a “global network of audit firms”. The word ‘network’ is rather vital to its mode of operation, as is evident from a brief glance.

A rather deliciously ironic instance that shows this up is where a wing of PwC provided advisory services to the Delhi Electricity Regulatory Commission (DERC). In 2007 and 2012, when the DERC was fixing multi-year tariffs, PwC won the bid to be their consultant and advised DERC on the tariff-­fixing exercise. It’s not known whether PwC presents only its specific unit that deals with consultancy projects to win the bid, or the network as a whole, including tax advisors and accountants. Anyway, the drama of confusing identities that ensued is worthy of a Rabelaisian comedy.

This year, the DERC decided not to engage an external consultant at all. Reason: they apprehend that PwC might win the bid! And why should that be an issue? ‘Conflict of interest’, it turns out. “Other entities under PwC’s network have acted as consultants and auditors for power distribution companies in Delhi,” says a DERC official engaged in the tariff-fixing exercise. “All these entities are said to be different, but eventually work under one brand. There’s a direct conflict: the same network advises the DERC which is fixing the tariff and the discoms who later contest the tariff!”

It is learnt that, under the contract, the DERC insisted that PwC not work with the discoms in any “tariff-related assignment”. PwC supposedly doesn’t engage the same partner and team that work with discoms in the tariff-related assignment, but all these departments work from the same offices and all emp­loyees and departments are housed there. (While PwC says it has stringent guidelines to self-regulate conflict of int­erest, the government’s norms on this differs from contract to contract.) The same pattern has been noticed by stakeholders in other cases too, the DERC official says, indicating a standard mode of operation. In fact, in this instance, the maze of mirrors may be even bigger...“similar networks are also consultants to the Union power ministry,” he adds.

There’s a crucial legal nuance here, where the Big Four and others exploit a loophole to spread their operations. Under law, only Indian entities can register with the ICAI to practise in this field. Foreign entities circumvent this through a maze of identities, cloaking themselves as ‘networks’. Typically, they float two legal entities—an Indian-owned, ­Indian-operated partnership firm that undertakes audit and accountancy projects, and the usually eponymous ‘company’ (like KPMG) that offers a host of other services, broadly in consultancy, which is allowed. The second type also has local owners and, in some cases, the same set of owners as the first type—the purely auditing firms.

A big case where an auditing firm’s work came up for some post-facto legal auditing was when, in 2014, SEBI barred real estate giant DLF and some of its officials from trading in securities for three years. SEBI had charged DLF with suppressing material facts relating to land ownership beyond the ceiling during a 2007 public offering through which it raised over Rs 9,000 crore. DLF approached the Sec­urities Appellate Tribunal (SAT) and presented five financial documents duly certified by a reputed CA firm. A SEBI official scrutinised them and noted in his affidavit that “the suppression of important facts and details…raises serious doubts on the conduct of the auditors”. It seemed they were “certifying documents as per the directions of the appellant” instead of providing a complete picture to the tribunal, he wrote.

Eventually, two of the SAT members called SEBI’s order a miscarriage of justice. Rejecting SEBI’s arguments, it also cleared the audit firm’s actions, holding that it was a ‘reconfirmatory’ opinion and that SEBI should have scrutinised the auditor’s role earlier—when the company was being listed. SAT presiding officer Justice Devadhar recorded a different view but wanted the restriction on DLF and its officials to be limited to six months. Though he did not delve into the audit firm’s role, he did hold that the documents showed ‘sham transactions’. SEBI has appealed the SAT decision before the Supreme Court. In the meantime, the litigation has played havoc with DLF’s share value.

The auditing firm in question is Walker Chandiok & Co LLP, and it exhibits the usual traits—it’s said to be part of the ‘network’ of Grant Thornton, a large foreign accountancy firm. Walker Chandiok & Co LLP and Grant Thornton share the same address and phone number on their letterheads and the latter’s Indian website. A spokesperson from Grant Thornton declined to comment, saying they hadn’t seen SEBI’s affidavit.


Two PW India auditors banned by ICAI in the Satyam case

Photograph by AP

Can these foreign accountancy firms operate in India? While they hide behind licensed chartered accountants, this is an ­indirect way of doing what they are barred from doing ­directly. In November 2016, BJP MP Varun Gandhi asked in Parliament whether the government was considering letting foreign firms register in India and the ICAI’s views on the subject. He also asked what the government was planning so that big monopolistic firms did not harm domestic auditors or engage in unethical practices.

Arjun Ram Meghwal, MoS for corporate affairs, said in res­ponse that there had been several requests but the governm­ent had not made any commitments at the WTO. In short, a curt ‘no, thank you’. The ICAI too did not support the entry of foreign firms, Meghwal added.

“Indian firms have a brilliant opportunity to make it to the next Big Four, as the PM suggested in his CA day speech,” says Vishesh Chandiok, CEO and managing partner of Grant Thornton LLP. “However, to be big, these four firms would also need to have their affiliations in all key countries. Therefore, it will help if India can either allow using global brands for CA services, or simply stop allowing global brands that offer CA-like services in other global markets from offering any services in India.”

Inquiries with the ICAI revealed a formal entry of foreign firms would be possible only under a reciprocal arrangement. “Indian accountants should be allowed to register and practise in those countries whose firms wish to register here. In fact, there’s a consensus that since we are a dev­eloping country, Indian accountants should be allowed to work in those countries for five years before they are allowed to register here,” says ICAI president Vikamsey. But that’s only the law. In reality, these firms have been active here ever since foreign capital and businesses started coming in post-liberalisation. Not just the Big Four but the next tier of firms such as Grant Thornton.

A top official of one of the Big Four says many of these issues are being raised by “smaller CAs”, who are disgruntled due to not getting a chunk of the major work related to the new Insolvency Code and GST. “The bigger firms have an advantage because they can tap into their global network to access experience and tech knowhow. Hence the public outrage on old issues,” says the official.

An official Ernst & Young spokesperson too said in an e-mailed response to Outlook: “The EY organisation is in full compliance of all rules and regulations in India. The EY global organisation has seve­ral independent member firms in India, owned by Indian Partners. These member firms provide different services to clients, which are in adherence with the independence guidelines outlined by Indian and global regulations,” says an official spokesperson of EY. The ‘independence’ being referred to there is from those who have financial interest in the company.

But it’s clear the regulators have been asleep at the wheel. On July 1, Prime Minister Modi had asked why it took the ICAI years to take punitive action when 1,400-plus cases were pending against CAs who “helped tax evaders”—Vikamsey, in defence, cites the recent crackdowns. But with big foreign firms, the regulatory trail…well…simply trails off. In 2003, the ICAI submitted a report to the corporate affairs ministry saying Multi-Nat­ional Accounting Firms (MNAFs) had entered India through “surrogate entities”, seeking action against them from the RBI and the external affairs ministry. After Satyam, the ICAI made another probe in 2011. This report also recommended action against the MNAFs that “entered the country in the 1990s under the guise of management consultancy firms”.

A chartered accountant in Bangalore, S. Sukumar, filed a writ petition in the Karnataka High Court in 2012, asking that the ICAI itself take action against these MNAFs. Later transferred to the Supreme Court, where it is pending, his updated petition (which Outlook has reviewed) reveals that, in 2013, the ICAI’s executive committee empowered its secretary to take action. An official spokesperson confirms the ICAI is “examining” various aspects but “since the issue is under investigation, no further detail can be shared presently.” In the Supreme Court, even PW India maintains that the issues are pending with the ICAI.

With oversight mechanisms so infirm, it’s business as usual on the ground. The actual consultancy work provided often does not stand up to scrutiny. Take EY, the one which has the Lehman Brothers on its (auditing) resume. Its website proclaims it as “among the leading providers of advisory, tax, transactions and assurance services...the number one professional services brand in India”. In Jharkhand, though, EY was dropped as a consultant to the state’s Urban Infrastructure Development Company (JUIDCO). A week after the state cabinet reportedly decided to drop EY from all PR work, JUIDCO’s project director D.K. Singh issued an order debarring the firm. Finding the firm’s work to be “of poor quality”, Singh noted that EY’s environmental/social impact assessment reports were a “copy-and-paste report because same mistakes were repeated again and again”. And when the government sought changes, EY sent back the documents without any of the reviewed changes.

“JUIDCO withdrew its debarment of EY, with effect from May 31, 2017,” counters the EY spokesperson. “There is, therefore, no debarment from JUIDCO. Separately, as a part of the investment promotion mandate awarded to EY by the state government, we had undertaken a project for brand-building of the state with the global and Indian investor community. We subsequently withdrew from this project as the government revised the terms of reference to focus on brand-building activities within the state.” The spokesperson said EY continues its two-year-old association with 10 departments of the Jharkhand government on several projects.


Former Tata Finance MD D. Pendse

A rather more tragic reminder of dubiety in work practices came early this July, when former Tata Finance MD Dilip Pendse took his own life in Mumbai. There was a prolonged controversy around Pendse’s role in the 2001 securities scam, including his shady deals with Harshad Mehta’s protege, Ketan Parekh. Pendse was no small fry; it’s said no door in the organisation was locked for him.

After SEBI indicted Pendse, the Tata group asked CA firm AF Ferguson to make a thorough investigation. AF Ferguson later fired Y.M. Kale, the partner who had prepared the report, saying he had botched it up. Observers felt Kale had likely been made a scapegoat; others at the firm would sur­ely have been aware of the report’s contents before it was submitted. Two years later, AF Ferguson merged into Deloitte Touche, another Big Four firm.

In the Global Trust Bank (GTB) scam, for which Parekh was convicted and sentenced, a JPC had made 277 recommendations in 2002. Of these, 276 have been implemented, save for one—action against the auditor, again PW India! BJP MP Kirit Somaiya, a qualified CA himself, wrote to ICAI on March 21, 2016, asking why. And also what agencies and regulators such as ICAI, MCA, RBI, CBI, SEBI and so on were doing about PwC which had figured in three major scams—GTB, Satyam and the Vijay Mallya case (pending in court and investigation).

The ICAI took a fortnight to send brief paras in reply to Outlook’s queries. Somaiya was luckier and received a detailed, two-page reply to his crisp letter on the same day. In brief, it said:

  • The ICAI’s disciplinary committee had found the auditors guilty in the GTB scam and recommended to the high court that they be barred from practice for three to five years.
  • In the Satyam scam, the ICAI recommended that the auditor responsible be permanently barred from practice.
  • The United Spirits inquiry was still in process.

The Vijay Mallya/USL case appears to repeat the Satyam pattern insofar as the auditor’s role is concerned. In May 2015, the ICAI announced it would probe the auditor’s role in the alleged diversion of bank loans/funds. The ICAI has not formally revealed anything on the progress of the case for over a year. Outlook has a copy of an RTI query sent to the ICAI asking what action was taken and which firm or auditor was responsible. In a reply on April 27, 2016, the ICAI said it does not have the auditor’s name. In a subsequent reply on June 27, 2016, the ICAI claimed it is exempt from disclosing the auditor’s name and cited a Delhi HC judgement that barred it from disclosing names.

The alleged diversion of Rs 2,100 crore between 2010 and 2013 was spotted by PwC UK, appointed under the new Diageo-led USL board after Mallya stepped down. How did USL’s earlier auditors miss it? And surprise, PW India had been the auditors till FY 2010-11, one of the years when the fund diversion took place. After 2011, Walker Chandiok was the auditor for USL. It was when another auditor, BSR & Co, pointed out anomalies in the 2013-14 annual report that PwC UK was brought in for another look.

In three cases—DSQ Software, GTB, and Satyam—PwC Bangalore’s then partner S. Gopalakrishnan was signatory to the audit report (2000-2007). It was only in the last Satyam audit report that a different partner of PwC, Srinivas Talluri, was the signatory. Gopalakrishnan, incidentally, was also a central council member of the ICAI when the Satyam scam broke. The ICAI permanently banned Gopalakrishnan and Talluri through disciplinary proceedings in 2012 and 2013 respectively. ICAI can only proceed against individuals, so no action was taken against the firms, but only against the partners and associates involved in the work.

In 2013, the Centre for Public Interest Litigation (CPIL) filed a PIL with the Supreme Court asking for guidelines to check scams from acc­ounting lapses and direct an investigat­ion into several irregularities by PwC firms. It alleged the PwC network is but a single ent­ity that operates various accounting, audit and other services in violation of several laws and operates in India despite being a foreign firm. CPIL suggests that falsification of accounts be made a non-bailable offence and an independent regulator for auditors be appointed on the lines of the public oversight board in the US.

The irregularities alleged by CPIL include PwC getting around Rs 240 crore from for­eign firms. Another Rs 41 crore, CPIL says, was paid into PwC Calcutta to acquire ano­ther CA firm, in violation of FDI laws since foreign firms cannot acquire Indian firms. PwC has hotly contested all these claims.

In 2016, the ED asked PwC about the foreign funds it got between 2007 and 2012. I-T authorities too raised issues about the funds, classified in legal terms by PwC as ‘Non-Refundable Grants’ and treated as profit. PwC says this was done so that the ‘grants’ could be taxed. But, that’s just the book-keeping end of it pertinent for tax pur­poses. If PwC is a mere network, why are foreign firms pumping funds into the Indian wing each year, duly booked as profits?

A PwC consultancy wing in Calcutta told the SC that these were meant for “enhancement of resources and skills to maintain global quality standards required from all member entities/firms of PwC network, which is critical for the protection of brand name/goodwill”. PwC accuses CPIL of ‘forum shopping’: that is, as there are separate fora for each of their allegations, CPIL is using the petition to get the court to activate all of them so as to smear its reputation. That may seem a valid argument, except only an integrated probe—rather than piecemeal ones by, say, the ED or I-T department—can reveal a holistic picture.

Doubts about the overall modus operandi are indeed rising. Justice Shah recently wrote to finance minister Arun Jaitley about the allegations against PwC. As chairman of the Citizen Whistleblowers’ Forum, he has asked the FM to cancel all existing government contracts to PwC and not allow fresh ones till a thorough, multi-disciplinary investigation is not concluded.

“Despite being inv­olved in scams like Satyam etc in which SFIO and CBI found it guilty,” Justice Shah writes, “PwC’s business from government projects is multiplying. Its headcount of employees handling government projects has increased more than three times over the last five years and this business is growing by 30 per cent, as widely reported in the media. The dichotomy in the approach of the regulators/administrators could not be more startling.”

Are the Big Four firms really separate entities under a ‘net­work’ or a single entity? Nobody is privy to the confidential arrangement bet­ween the network’s Indian and global partners. CPIL has pointed out that insurance premiums are only paid from the accounts of three firms in India, not separately by each firm as would be the case for a network.

As Justice Shah suggests, the violations need to be looked at collectively. Not just one auditor, but the operations of all MNAFs with similar structures. The PM’s call to action is handy. Here’s a whole area that cries out for action, with too many implications for India’s public res­ources and projects and general corporate practices if left alone.