It was only yesterday that the newspapers reported that the Ministry of Corporate Affairs (MCA), has approached the NCLT seeking to ban two well known multinational audit firms, Deloitte and KPMG part of the powerful BIG FOUR audit firms, from taking any audit assignments for a period of five years. Such a severe punishment is being sought for these firms and their guilty partners, for their dubious unscrupulous role in the audit of IFIN, the key subsidiary of ILFS, which is at the centre of the giant ILFS scam of Rs. 1,32,000 crores. The SFIO has alleged in its investigation report that these two well known audit firms and their senior partners led by Udayan Sen are guilty of falsifying financial statements, knowingly signed false statements, conniving with the IFIN management to conceal information, not following the mandatory auditing standards and not reporting illegal and bogus loans. These findings of the SFIO clearly show these famous audit firms, to be active participants and beneficiaries of the ILFS scam. The SFIO has undisputed evidence that these audit firms and their partners were aware of the fraudulent activities of ILFS and that they benefitted financially, by compromising their integrity as auditors of these companies.
The Indian audit profession, particularly these Big Four audit firms, have been on the defensive ever since the new Companies Act, came into force since 2013, under which auditors face criminal liability for their misdeeds and misconduct and unlike earlier where the audit firm could not be punished, and only the partner who signed the audit reports was, now even the firm can be penalised and banned. It maybe recalled that in case of the Satyam scam, while the auditor PWC faced no punishment, it was their partner Srinivas Talluri who went to jail. Not only has the Companies Act been strengthened to punish the delinquent rogue auditors, but even other authorities like SBI, RBI, SFIO have been empowered to prosecute and punish auditors. Moreover, ICAI the audit regulator which has a poor track record in punishing the big and influential audit firms, and is known to be lenient on them, has been divested of its disciplinary powers, which have now been given to the newly constituted NFRA. Last year SEBI imposed a two year ban on PWC, for its dubious role in the Satyam scam.
Auditors are now being taken to task for their negligence and collusion and the results are showing. There was a spate of auditor resignations last year, led by Vakrangee, Atlanta and Manpasand Beverages and that has reached a six year high so far this year. It is now a changed environment where auditors are facing consequences for their negligence or corruption. The latest one to resign is PWC, which has resigned as the statutory auditor of Reliance Capital and Reliance Home Finance, the flagship companies of the Anil Ambani group. It has resigned wef 11.06.19, stating that it has not been given satisfactory reply to certain transactions, which are significant and material to the financial statements of Reliance Capital and Reliance Home Finance. It says that it has been prevented from performing its duties as statutory auditors and exercising independent judgement and thus is not in a position to complete the audit and is compelled to resign. It will therefore not sign certify the audited financial statements of these Reliance companies for the FY ended 31.03.19, which were under finalisation and were to be approved by these companies in their board meetings scheduled to be held on 28.06.19.
The Ambani group denied these allegations of PWC. It states that it has given all the required evidence, confirmation and certification to PWC and has threatened to sue PWC. The fact is that PWC’s resignation is under a cloud and gives rise to many questions which need to be answered by it :-
- Why did PWC not resign earlier and why now when the financial statements of these companies were to be finalised. Were they not aware of these issues when they performed the quarterly audit throughout the year?
- PWC has been the auditor of these companies since many years, when the same issues it now objects to were present. Then why did it issue clean audit reports in those years.
- What are those factors due to which PWC is unable to complete the audit and is compelled to resign, but the other statutory auditor of these companies has not.
The share price of these Reliance companies has fallen due to this resignation of PWC and will fall further, and so could be the image of PWC.