A SERIES of financial scams that have unfolded in India of late have brought into focus the need to tighten up the finance and auditing business in the country.

Reacting to the unnerving crisis that has rocked the public sector banking segment — where Punjab National Bank (PNB), the leading nationalised lender, was duped of a whopping Rs127 billion by overseas Indian business barons in league with some employees — the government earlier this month hastily agreed to set up a National Financial Reporting Authority (NFRA) under the Companies Act, a move that had been proposed more than five years ago.

India is one of the few leading economies that still do not have a government appointed body to oversee the activities of auditing firms. Both the US and the UK have set up independent regulators to monitor industries, especially in the wake of scandals such as the one involving Enron.

The Institute of Chartered Accountants of India (ICAI), a self-regulatory body, grants licences to auditing firms and chartered accountants in the country. But the ICAI is believed to have opposed the setting up of the NFRA and the government allegedly succumbed to the pressures for many years. It proposed the setting up of the NFRA and a parliamentary panel also approved the move about eight years ago.

The shocking case has woken up the authorities to the ease with which powerful businessmen manage to get away with massive frauds. The government has hastily agreed to set up a National Financial Reporting Authority, a move that had been proposed more than five years ago

The matter has dragged on as there was no seriousness on setting up the regulator. But with the surfacing of the PNB scam, the National Democratic Alliance (NDA) government could not afford to sit over the pending legislation.

Finance minister Arun Jaitley claims that some business firms together with their chartered accountants (CAs) had, for years, ‘round-tripped’ money into the country by setting up shell companies.

Last week, he however, assured the ICAI that the NFRA was not meant to replace its disciplinary jurisdiction. According to him, the ICAI will continue to exercise its powers over small companies, accounting for the bulk of routine cases, while the new body will have jurisdiction over listed companies and large, unlisted ones.

The NDA government has been stung by the PNB scam, in which billionaire diamantaire Nirav Modi and others got fraudulent guarantees for short-term overseas loans from the PNB. The shocking case has woken up the authorities to the ease with which powerful businessmen manage to get away with massive frauds.

It also raised doubts about the effectiveness of internal and external audits, both of public and private sector banks and companies.

The ICAI last week set up a high-powered group to understand the ‘systematic loopholes’ behind the Rs127bn fraud and for remedial measures.

“The high-powered group appointed by the ICAI is awaiting the required documents and information from the PNB officials to find out the systemic loopholes,” an institute spokesperson said last week. “It is worthwhile to mention that the group recommendations are dependent on the availability of documents and information.”

The ICAI has also written to the bodies probing the scam including the Central Bureau of Investigation, the Enforcement Directorate and the Securities and Exchange Board of India.


IT was way back in 1990s that notorious CA firms — including international ones — were castigated by investigative agencies for their role in suppressing and continuing with scams such as the one relating to stock markets by many leading firms.

More than a dozen leading auditors were indicted by a parliamentary committee, but the various ministries and agencies failed to take action against them. The scams included those relating to notorious finance kingpins Harshad Mehta and Ketan Parikh and the Satyam scandal in Andhra Pradesh.

A few weeks ago, the Securities and Exchange Board of India (SEBI) found international advisory, tax and regulatory services firm PwC guilty in the Satyam scam and prohibited it from issuing audit certificates to listed companies in the country for two years.

The regulator also ordered the disgorgement of over Rs130 million of ‘wrongful gains’ from the auditing firm and its two erstwhile partners who had worked on Satyam’s accounts.

A PwC spokesperson expressed disappointment with the SEBI probe and the adjudication order and was confident of getting a stay on the same. The firm claims there was no wrong-doing on its part “in the unprecedented management perpetrated fraud at Satyam, nor have we seen any material evidence to the contrary.”

The pressure on the chartered accounting community was also evident in the case involving Karti, the son of former finance minister — and Congress leader — P. Chidammbaram. Karti was arrested last month for alleged irregularities in the Foreign Investment Promotion Board (FIPB) clearance given to a media house — INX Media — when his father was the finance minister.

Karti had allegedly got about a million dollars for the FIPB clearance from his father for the company. His chartered accountant, S. Bhaskararaman, had also been arrested by the Enforcement Directorate. Last week, a Delhi court, however, granted bail to the CA, but ordered him not to leave the country.

Government agencies accuse Bhaskararaman of helping Karti ‘manage’ his ‘ill-gotten’ wealth both in India and abroad.

Meanwhile, the growing number of scams involving government officials and multinational accounting firms (MAFs) has resulted in the Supreme Court directing the government to consider setting up an expert panel to regulate their operations in India.

“The absence of revisiting and restructuring oversight mechanism (as discussed in the judgement) may have adverse effect on the existing chartered accountancy profession as a whole on the one hand, and unchecked auditing bodies can adversely affect the economy of the country on the other,” said a judgement by the apex court recently.

The court’s order follows petitions by NGOs that had sought a probe into the functioning of international accountancy firms operating in India and allegedly involved in financial irregularities and fudging of accounts.

Published in Dawn, The Business and Finance Weekly, March 19th, 2018

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