The Securities Exchange Board of India (SEBI) recently banned Price Waterhouse, the Indian affiliate of Pricewaterhouse Coopers (PwC), for the next two years from auditing listed companies in the country. SEBI took almost 10 years to act against PwC for its gross negligence in exposing fraud in the financial statements of Satyam Computer Services, Hyderabad. The once reputed audit firm has unsuccessfully appealed to Securities Appellate Tribunal against SEBI's ban order.
The audit firm, which figures among the 'Big Four' global audit firms, did not use minimum professional norms in the course of its work. Such an inordinate delay to enforce regulation against PwC will affect investor confidence, which is directly linked to a vibrant capital market, with wider ramifications for the national economy.
SEBI highlights that PwC completely ignored the discrepancies pointed out by the client's internal audit. Satyam inflated financial numbers, which the company's chief Ramalinga Raju subsequently confessed in a written note in January 2009. Clearly, PwC had failed to exercise even the minimum 'lookout' required by a statutory auditor. It even ignored a whistle-blowing letter by an independent director of Satyam during December 2008.
Evidently, the company management fudged the financial statements with the knowledge and involvement of their auditors. Therefore, SEBI has indicted PwC of acquiescence and complicity, which indicates that it accepted the information that the Satyam management provided at face value.
Clearly, PwC only attempted to leverage its brand equity to associate with the audit process, without any application of mind. In retrospect, PwC states that it has done its best over the last nine years to develop a robust audit practice. PwC maintains that it did no wrong and even challenged SEBI's jurisdiction.
In the future, the concept of joint audit may become a reality, after extensive deliberations and a panel report related to audit firms, the government has now decided to allow companies to have joint audits in case it is insisted upon by an overseas investor. This will enhance the prospects of domestic audit firms to support the capital markets through quality work, which would amount to adequate risk mitigation for investors. In a sense, it would foster competitive audits which would be a step towards transparency and boost investor confidence further. Moreover, joint audits would serve to break the stranglehold of the Big Four, namely PricewaterhouseCoopers, KPMG, Deloitte and E&Y, towards a more level playing field for audit firms.
The failure of company managements to make authentic disclosures about their financial health adversely affects stakeholders' interests. These include investors, lenders, vendors associated with companies besides the government, which stands to lose on revenue collection due to distorted financial statements. Sometimes, managements of companies tend to fudge and window-dress financial statements to conceal their poor performance and mislead stakeholders. Several statutory auditors issue audit certificates purely to ensure continuation of their association with the client. Failure on the part of the statutory auditor to make a qualifying statement to highlight grey areas, if any, suggests lack of professionalism.
Though SEBI as a capital market regulator in India has introduced many effective measures, both in the primary market and secondary market, it compares poorly with its US counterpart, the much-feared Securities Exchange Commission (SEC). The SEC is strict on securities-related crime and fraud. The Sarbanes-Oxley Act (SOX Act) of the US aims to protect investor interests through insistence on authentic financial statements. This statute addresses all issues associated with corporate failures to achieve quality governance. The provisions of SOX are supremely stringent.
Also, the Ministry of Corporate Affairs needs to review the role of the Institute of Chartered Accountants of India (ICAI) in the backdrop of the Satyam case. It is necessary to empower the ICAI through incorporation of relevant amendments to the Chartered Accountants Act, 1949, to enable it to take strict action against errant audit firms. Moreover, the role of the Board of Directors is critical for corporate governance and especially independent directors play a key role. The directors must be value-driven and contribute to a high degree of transparency.
Considering the size of the Indian capital market, SEBI has a daunting task, especially with immense interest by FIIs. While SEBI has evolved since its inception in 1988, more needs to be done to further strengthen the regulator.
SEBI's inordinate delay in acting against PwC creates doubts in the minds of investors about the market regulator's capabilities and willingness to crackdown on wilful defaulters. SEBI, with 20 regional/branch offices across the country, besides a central office in Mumbai, has to be adequately staffed in order to effectively handle investor complaints. It must be able to act suo moto or unilaterally whenever it comes to know about any fraud in the capital market.
(The writer is Professor of Finance, Institute of Management, Christ Deemed to be University, Bengaluru)