With auditors like these, who needs…

The logo of IL&FS (Infrastructure Leasing and Financial Services Ltd.) installed on the facade of a building at its headquarters in Mumbai. REUTERS

Top consultancy and audit firms KPMG, Deloitte, Ernest & Young and Price WaterhouseCoopers (PWC) cannot be allowed to connive with managements and hold to ransom companies, investors, lenders and other stakeholders. Zero tolerance towards corporate frauds and cheats will have to be practised diligently. And, if the big four audit firms have willingly become partners in crimes with managements, they should be banned. Deloitte’s global CEO Punit Renjen cannot be allowed to make a veiled threat that a ban on foreign audit firms could impact Indian corporates and stock markets. Similarly, credit rating agencies will have to behave more professionally if they are to deliver realistic rating of companies and other market players. Markets watchdog Securities Exchange Board of India (SEBI) has rightly asked these rating agencies to compulsorily red-flag potential defaulters, companies getting into red or those likely to have systemic bearing on the markets.

Regulatory action against Deloitte, E&Y and KPMG owing to professional misconduct is welcome. Deloitte Haskins and Sells and BSR & Co, which is part of KPMG’s network, face complete ban from pursuing audit practice after they reportedly concealed the bad loans of IL&FS group companies. This major violation has singed the Indian markets, with a liquidity crisis hitting the non-banking finance companies. PWC had faced ban on audit practice after the major fraud perpetuated at Satyam Computers by its promoter Ramalinga Raju nearly a decade ago. The convoluted proceedings at the Securities Appellate Tribunal (SAT) have been completed, but it is yet to ban PWC from undertaking audits. PWC quit as statutory auditors for Reliance Capital and Reliance Home Finance last week but the move is being seen as a ploy to escape a ban on its audit practice in India. Between the top four audit firms and their network, 346 top-rated Indian companies are audited. Given the five-year cut-off limit, these audit firms manage accounts of these companies amongst themselves over a 20-year period on rotation. This again smacks of an arrangement of convenience.

It is not just the internal and external auditors that have wilfully entered into unholy alliances with managements. Credit rating agencies have also thrown to wind professional ethics while assigning a particular rating for debt or equity paper of a corporate. This misconduct forced SEBI to tighten norms on rating agencies as well. Unless the government decides to clean up frauds in the corporate world, India’s international standing is bound to suffer reputational damage. Foreign audit firms, consultancies and rating agencies will have to behave. If required, the top partners of these firms should be severely punished with jail terms for having violated norms.

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