The Hindu Business Line : Suppressio veri, suggestio falsi

THE punch line of one of the most famous songs of the rock group Eagles goes "The future is in the air, you can see it everywhere, listen to the Winds of Change". The accounting profession is certainly going through this ever since the days of Enron and WorldCom.

The Public Company Accounting Oversight Board (PCAOB), the engine to drive the implementation of the Sarbanes Oxley Act (SOX), is working overtime to ensure that all accounting firms come out spotless and there is a scar on those that don't.

A recent decision of the PCAOB should send alert signals to the regulators in India and probably to the Institute of Chartered Accountants of India (ICAI), which is the supreme in deciding cases of professional misconduct in India.

An accounting firm in the US, G&M, based in New York City, was notified in September 2004 that the firm would be inspected by the PCAOB in November 2004.

The PCAOB's Division of Registration and Inspections directed a request for information and documents to the firm's managing partner.

The Board found that, in responding to the request, the managing partner and two partners were aware that the firm had prepared the financial statements of two of its public company audit clients, contrary to auditor independence requirements of federal law.

The Board found that the partners took steps to conceal that fact from the Board by omitting certain requested information from the firm's written response to the inspection request.

Reminiscent of the Enron days, the Board also found that the partners, after learning of the imminent inspection, formulated and carried out a plan to create and backdate certain documents and place them in the firm's audit files to conceal from the Board the firm's failure to comply with certain auditing standards.

SOX specifically prevents an auditor from providing book-keeping services to a client. This rule was apparently violated in the instant case since almost all the financial statements were prepared by the accounting firm.

It was clear during the course of the enquiry that the partners were keen to suppress the information about the provision of book-keeping services and the effort to back-date the documentation.

The PCAOB had also asked the audit firm to submit information about the number of hours that the partners and assistants had worked on a particular assignment.

Since the firm had provided book-keeping services also, they thought it best to omit the number of hours spent on book-keeping assignments with the client. The PCAOB, however, caught the firm in the Act.

The PCAOB revoked the registration of the public accounting firm and barred the firm's managing partner from association with a registered accounting firm after finding that they concealed information from the Board and submitted false information in connection with a PCAOB inspection.

As for the remaining two partners, the Board limited the sanctions of the two men to censures because they promptly and voluntarily brought the matter to the Board's attention, disclosed their own misconduct and the misconduct of others, and made affirmative efforts to provide the Board with relevant information.

Back home, we are used to removing the name of the firm/partner for a specified period of time. We are also used to censuring members decades after it has been found that something was amiss in the conduct of the firm.

The above decisions would be an eye-opener for accounting firms in India to get the basics right and not suppress any information. A tall but efficient requirement.

(The author is a Hyderabad-based chartered accountant.)

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