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KPMG India in a Million Dollar Settlement with PCAOB without any Fallout in India
Inspired by Sucheta Dalal
Introduction - Since I have started writing a couple of decades back the one person who has influenced me the most and still does is Sucheta Dalal. I have written about what KPMG has done in the article PCAOB Sanctions KPMG Firms and Audit Professionals. It has been published on LinkedIn and on Compliance Calendar blog on 12th December.
After that she has written on the same subject. There are some very important things she has touched upon which needs to be emphasised and discussed with our community defined as CAs and CA students.
The PCAOB (The Public Company Accounting Oversight Board) regulates the audits of public companies and SEC-registered brokers and dealers in the US in order to protect investors in the public interest in preparation of informative, accurate, and independent audit reports.
KPMG India settled before the PCAOB on 6 December 2022. But surprise surprise. There is no coverage in India.
PCAOB condemned KPMG Assurance and Consulting Services LLP (KPMG India) and the engagement partner (EP) Sagar P Lakhani for quality control failures, supervisory failures and documentation failures while working with a public company in 2017.
It led to a monetary penalty of $1 M on KPMG India and $75,000 on Mr Lakhani, who has been suspended from associating with a registered public accounting firm for one year and requires KPMG India to undertake and certify the completion of certain improvements to its system of quality control systems.
This is the second time such sanction has happened which relates to an Indian listed entity. The last time was when Satyam Computers collapsed. In May 2011, PCAOB settled an investigation imposing a penalty of $1.5 M plus $6 M by the Securities Exchange Commission (SEC) of the US on five firms of PricewaterhouseCoopers International (PWC) in India. The five PWC entities who participated in the settlement were: Price Waterhouse and Price Waterhouse & Co in Bengaluru, Lovelock & Lewes, Price Waterhouse and Price Waterhouse & Co, Kolkata.
Then, PCAOB’s order correctly said that the reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports.
That is why it is surprising that the latest order against KPMG has had no impact in India, and there's nothing in India’s market regulator or audit regulators – The Institute of Chartered Accountants of India (ICAI) or National Financial Reporting Authority (NFRA).
We had expected follow-up on the KPMG India matter. And there are several good reasons for this. First, since it is a settlement, the order does not identify the listed company in which these lapses occurred in 2017. All it says is that the issuer is into wholesale and retail banking and treasury services, headquartered in Mumbai.
The detailed order documents how eAudIT, a proprietary software of KPMG, was misused— they were aware of it but did not stop the misuse. Did the sign-off on blank documents only happen with the bank referred to in the PCAOB order? Was Mr Lakhani the only engagement partner who did this, or was he just unfortunate to be caught?
ICAI, NFRA and the Securities & Exchange Board of India (SEBI) ought to investigate how extensive the practice was and what impact it had on the final audit reports.
Sucheta Dalal emailed KPMG India’s communications department for comments on the PCAOB order. Her article will be updated if they respond. The PCAOB order says that KPMG India has disciplined some personnel and has established and implemented changes to its quality control policies and procedures.
Who Is the Unnamed Bank?
PCAOB’s order details the impact of these lapses on the accounts of the bank, whose identity means a lot to Indian investors and regulators. Since KPMG India and Mr Lakhani are together paying $1,075,000 the lapses are so serious to demand further investigation and Indian investors have the right to know the bitter truth .
The central character is the Mumbai-based private bank with US listing. Sucheta Dalal reached out to some senior people with KPMG links, but they chose to remain silent.
But we are not surprised. Our profession has got away with very relaxed oversight over decades by ICAI. When NFRA chose to act tough we tried to take away the new regulator through the Ministry of Corporate Affairs (MCA) in September 2021.
Let's explore what had happened. In January 2020, when NFRA issued its first set of show-cause notices to auditors of IL&FS Financial Services (IFIN), the two chartered accountants (CAs) rushed to the Delhi High Court with a writ petition, instead of responding to the new regulator. Deloitte Haskins and Sells and BSR & Associates (KPMG India) were the two auditors.
Senior CAs wrote how the profession and industry leaders were upset at NFRA’s action since the firm was superior to most others in the field and suggested that only individual partners should be held responsible and the audit firm let off as debarring a firm causes a lot of disruption.
This view is ironic, as compromise and conspiracy are usually institutionalised as the rewards and incentives of partners are tied to the business generated by them. While partners guilty of professional misconduct who permit the fabrication of accounts must be penalised, sparing the firm will allow large audit firms to make scapegoats out of partners who get caught.
Fortunately, NFRA wasn’t intimidated by the commotion created by the accounting industry. In July 2020, NFRA issued three orders against the engagement partners for IFIN. CA Rukshan Daruvala of Deloitte Haskins and Sells LLP was debarred for five years and slapped a Rs 5 lakh penalty; CA Shrenik Baid was also debarred for five years but was penalised Rs 15 lakh, while CA Udayan Sen, CEO, Deloitte India, was penalised Rs 25 lakh and debarred for seven years.
The findings in all cases were similar—professional misconduct, collusive behaviour in going along with management in agreeing to misstatements/omissions leading to fraud on the users of the financial statements.
NFRA also indicted SRBC & Co, of the Ernst & Young (EY) group for deficiencies in auditing Infrastructure Leasing & Financial Services (IL&FS) for FY 17-18.
All this is good but it is too little, too late. Three other orders were passed since then. Alll in 2022. CA Gulshan Jagdish Jham was debarred for a year and slapped with a penalty of Rs 1 lakh for professional misconduct, failure to report material misstatements, and exercise due diligence in the audit of Prabhu Steel Industries Ltd.
CA Som Prakash Aggarwal (of S Prakash Aggarwal & Co) was debarred for three years and slapped with a penalty of Rs 3 lakh as EP of Vikas WSP Ltd. He was also asked to undertake training on accounting and audit standards and submit proof thereof within 180 days.
CA Rajiv Bengali (of Subramaniam Bengali & Associates) was barred for five years and a penalty of Rs 5 lakh. As EP for Trilogic Digital Media, he was charged with false reporting in the independent auditor's report, failure to comply with auditing standards, etc.
Given the number of forensic audits ordered by SEBI and the falsification of accounts or diversion of funds brought out during the bankruptcy resolution process of corporate defaulters, regulatory action seems too little, too slow.
V Ranganathan, former director and partner at Ernst & Young LLP, says that public banks have written off more than Rs10 T in the last five years and the average recovery has been so poor it is a reflection of the audit at the banks’ and the borrowers’ end.
It is high time the government takes this issue seriously and strengthens the system and makes it robust to monitor the audit firms and create a distinct legal framework for swift and fair trials.
Some favour the US-style settlement process adopted by PCAOB and KPMG India to our slow and agonising process. But we have seen how the settlement provision has been vitiated by arbitrary settlement amounts at SEBI. Often, the penalties are trivial, and there is no information on the wrongdoing or its impact that will help or warn investors.
Last but not the least, there seems to be no shame in ‘settling’ wrongdoing, which defeats its very purpose. Sucheta Dalal's sources told her a whole bunch of ‘consultants’ have set up shop, offering to negotiate quick and low settlements with the regulator.
Even in the KPMG India case, the PCAOB order is not satisfactory as it does not name the bank involved. If PCAOB’s claimed objective is to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports, the settlement order tells us nothing about whether or not the bank’s audit was compromised and to what extent. How does that protect investors?
Compromised, conniving or negligent auditors are a big worry for any lender or investment professional. Apart from a few good orders from NFRA, some in our profession, especially after the IL&FS debacle, have tried to separate audit and non-audit business. Others are sticking to the claim that there is no conflict of interest.
In Sucheta Dalal's view, it is too early to introduce a ‘settlement’ system in India. It would be far better to strengthen NFRA and give it more teeth and manpower to effect a serious clean-up first.
To be continued