Manipulation of Rs. 13,500 crores; Punishment– only a year’s ban

When a lender gives a loan to an unworthy borrower, who obviously defaults, both of them land in a crisis and both can get bankrupted, as we see in the case of so many government-owned banks which are being recapitalised by the government and are being nursed back to health, under RBI’s PCA regime. In such a case, the balance sheets of the banker and the borrower, both get infected with losses, which is what is called India’s twin balance sheet problem viz. bankers and the borrower, both in a soup. The other common feature of both these entities is that both of them manipulated their respective financial statements and hid their losses due to such bad loans. Their balance sheets showed a rosy picture which was false. When you talk of the manipulation and window dressing of the books of accounts of any entity, more so of a bank or a large NBFC, while its dubious management/directors would be ever willing to do so, it cannot yet happen unless the auditors are incompetent, negligent or corrupt and thus connive with them. Large scale manipulation of accounts is certainly not possible without the active connivance and participation of these auditors. It is only when the auditors permit that financial statements are falsified and made bogus and that is how India’s colossal NPA crisis of over Rs. 15 lakh crores remained hidden for years and has crippled India’s banking system.

It is now evident from the investigations conducted by the likes of the MCA, RBI, SFIO, ED etc. that the rampant manipulation of accounts, that took place in banks like Axis/Yes Bank and big NBFCs like ILFS, was done with the conscious connivance of their auditors who did not report the actual state of affairs. If the multinational audit firm Deloitte’s misdeeds have been thoroughly exposed in the case of ILFS, where it played a key dubious role, the RBI investigations also reveal that, in the case of Axis Bank and Yes Bank, where bad loans were hidden and books of accounts were manipulated. It is an audit firm called S R Batliboi & Co., a flagship associate of EY, yet another giant global entity that played a key role. The findings of the authorities are that these audit firms compromised their independence/integrity and gave a clean chit to the entities that they audited. These audit firms like Deloitte and EY are part of what are called the Big Four multinational accounting firms, who are huge and powerful, with humongous resources and networking by which they generate their giant profits and also protect their interests and perpetrate their hegemony and virtual monopoly in the audit and accounts profession. Take the case of EY alone, whose global billings last year were about USD 35bn, with offices in 150 countries, and staff of 2,70,000. These firms tend to dominate the national regulators itself due to their might and power.

The newspaper reports say that the RBI has banned the audit firm S. R. Batliboi, a key member of the EY group for a year, from undertaking any audit assignments of banks for a year, after numerous lapses and violations were found in the books of account certified by them. This action of RBI is pursuant to a manipulation of Rs. 13,500 crores in the books of accounts of Axis Bank and Yes Bank in FY 2015-16, which were certified by S. R. Batliboi. It was an act either of negligence or incompetence or collusion, but it was a serious lapse on the part of the auditors, due to which profits of these banks were overstated to the tune of Rs. 13,500 crores. A ban for merely a year for such a giant lapse and that too it is a ban only for bank audits, is too little and is not commensurate with the crime. It can continue all its other activities, including audit of other companies. Such a minor punishment for such a huge lapse on the part of the audit firm is shocking and raises further disturbing/relevant questions.

1. Is the ban only for a year an enough punishment for participating in a Rs. 13,500 crores manipulation of accounts? Should it not be much much longer?
2. What about the personal accountability of the individual partners of the audit firm, who authorised and gave clean reports to manipulated accounts? Why is no action being taken against them.
3. Why has the RBI taken such action after almost five years after this misconduct of the auditors took place?
4. What about disgorgement and taking away all the profits and benefits earned by this audit firm by compromising its independence and integrity?
5. Now that the RBI has taken such action, will other agencies like the ICAI, SEBI, SFIO etc. also investigate and suitably punish these auditors?
6. When will criminal investigation agencies take action by imposing penalty and prosecution on all those who participated in such falsification of accounts?

And if no further action is taken against the auditors for such serious misconduct, then it only proves that these Big Four audit firms, are above the law of India and will continue to indulge in such acts and will undermine the system.