The exit of PricewaterhouseCoopers (PwC) as the auditor of Eveready Industries, Reliance Capital, Reliance Infra and Reliance Home Finance after differences over the books has increased pressure on rival firms, rating agencies and banks to take a quick decision on companies with dodgy accounting.
With June quarter results coming up, many audit firms that have a difference of opinion with managements over the numbers are in a quandary—should they resign or heavily qualify their audit reports?
The PwC move comes in the backdrop of the profession running into a rough patch after the auditors of Infrastructure Leasing and Financial Services failed to issue warning of a shock default that set off a liquidity crisis and roiled the financial markets. With earnings due shortly, the auditors don’t have much time, experts said, adding that PwC’s use of what’s seen as the weapon of last resort has jolted the industry.
Following PwC’s departure, all the companies concerned have replaced it with an Indian auditor, not a Big Four firm (Deloitte, KPMG, EY or PwC).
PwC’s questioning of intracompany transactions will force the rating agencies to reconsider their ratings while banks will have to take another look at assessments.
“Each player in the ecosystem has to do its part well for improvement of governance,” said JN Gupta, founder of proxy advisory firm Stakeholder Empowerment Services (SES). “The problem is that no one wants to be different. Each one wants to conform to the existing norms. Now, they are all acting out of fear.”
Some experts said the move may burnish PwC’s image following a ban on the company by Sebi over the fraud at Satyam Computer Services, where it was the auditor. The ban has been stayed pending its appeal before the Supreme Court.
“The firm wants a clean slate to build a quality long-term business and it’s willing to take tough decisions towards that end. It may take us longer but we want to grow the business the right way,” said an insider who is not authorised to speak to the media. However, PwC’s own client acceptance policies are also under question.
PwC did not respond to questions from ET. Deloitte and KPMG network firm BSR & Co face the prospect of a ban over their role in IL&FS while EY firm SR Batliboi & Co has been banned by the RBI for lapses in a statutory audit.
Some leading auditors have started forensic checks over possible corporate governance wrongdoing. “This is being done without the knowledge of the companies. People are being sent on the ground to see if the projects — even in cases where end-use certificates are there — are actually on track, among other things,” said a forensic partner with a major firm. In most cases, auditors rely on bank certificates and other documents provided by the company and their advisors to carry out certain entries.
However, in the case of IL&FS Financial Services, the auditors are accused of not cross-checking the on-ground status of certain infrastructure projects.
The Indian auditing firms are also being cautious. “Even smaller firms are being more careful. No qualification is small enough to be missed,” said Neeraj Bhagat, CEO, Neeraj Bhagat & Co.
More auditors are likely to jump ship. “Auditors do not have the wherewithal to deal with criminal proceedings initiated like in the case of IFIN and this has really spooked several mid-level executives in audit firms. Many more resignations may be rendered in during the next few months,” said an audit head in one of the top six firms.
The role of a joint auditor, where present, is also being questioned in the PwC cases. Why didn’t the joint auditor have doubts about the accounts? The role of independent directors in these companies is also open to scrutiny — what was their position on the accounts?
“For many auditors, the risk-reward ratio doesn’t make sense. The regulators have to distinguish between cases where auditors are helping promoters manipulate accounts and perpetuating the fraud,” said Suresh Surana, managing partner at RSM.