Auditing worries

Mukesh Aghi | Updated on July 17, 2019 Published on July 17, 2019

‘Scapegoating’ firms will hit investor sentiment

According to media reports, the Serious Fraud Investigation Office (SFIO), along with the Ministry of Corporate Affairs, is moving the National Company Law Tribunal to debar some of the major global network audit firms from auditing for five years. In a separate action, the Reserve Bank of India has reportedly banned another globally networked Indian audit firm from auditing banks for a year.

Also another firm is battling a SEBI ban. These developments are a cause for serious concern, especially in terms of India’s hard-won reputation as a transparent and fair market for all stakeholders, offering the benefit of due process and fair treatment under law.

Problems at financial institutions are extremely complex, involving several stakeholders including management, board, shareholders (including government), rating agencies, stock exchanges, analysts, internal auditors and regulators in addition to statutory auditors.

Allocating responsibility for problems in such institutions requires a careful and objective analysis of the facts and circumstances. This includes an analysis of the role played by each stakeholder in the planning, execution and oversight of the various actions. The results of analysis/investigations need to be considered by the competent authorities under law before giving a ruling.

A balanced and careful consideration is an appropriate approach to address challenges currently facing the NBFCs. In this context, deliberate, thoughtful, and methodical regulatory and law enforcement actions will enhance market security rather than exacerbating risk.

The expeditious implementation of the National Financial Reporting Authority was a commendable step. Similarly, the Supreme Court-appointed commission last year did a good and balanced job of evaluating the audit profession and its relevance/importance to the Indian economy. Although there is often an impulse to focus immediately on allocating responsibility for disappointments, rushing to judgment risks identifying scapegoats rather than culpable parties, particularly in complex circumstances.

While investigating agencies are empowered to come to their own conclusions, it is extremely important that any recommendations to competent authorities be kept completely confidential until the affected parties have had a chance to respond in the appropriate forum. It is imperative to retain India’s perception as a mature and attractive investment destination offering all market participants the opportunity to benefit from due process without interference or distraction from misleading and damaging media reports that often lead to confusion between a recommendation of a penalty and the imposition of such penalties.

India is now one of the top 10 most attractive investment destinations in the world. Clearly, we would not want to do anything that can go against the existing positive sentiment that is well set to renew following the formation of Modi 2.0 government. An irrational and hostile environment enervating investor confidence in due process under law can dial back foreign investment commitments, causing loss of investment and jobs. Discouraging globally networked Indian accounting and service firms through interference with the due process not only risks erosion of benefits from these capabilities, but also damages India’s credibility amongst other foreign investors. We can ill afford this as we seek to reinvigorate our economic growth.

The writer is CEO and President of the US- India Strategic Partnership Forum

Published on July 17, 2019

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