A month ago, India’s businesses were relieved that the Satyam issue had been resolved without any regulatory overreaction. But that may have been premature. The aftermath of Satyam is slowly giving rise to a backlash against foreign-affiliated accounting firms.
Last month’s Central Bureau of Investigation (CBI) Satyam chargesheet noted that the Price Waterhouse partners who had audited the software giant had violated accounting norms. In response, the Institute of Chartered Accountants of India (Icai) last week issued a notice to 12 accounting firms that are partnered or affiliated with global companies. But why is Icai bothering 12 companies when the possible perpetrators may belong to only one?
Illustration: Jayachandran / Mint
Foreign accounting firms face obstacles that add complexity. India hasn’t fully liberalized its accounting services sector: KPMG or Ernst and Young are allowed to set up shop here as consultants, but not as auditors. But local auditors are allowed to partner with these global ones, with a caveat: The local firms aren’t allowed to explicitly display this affiliation in, say, their official stationery.
Accounting partnerships are structured peculiarly. The 1956 Companies Act restricts not just the number of partners in an accounting firm, but also the number of companies the firm can audit. To get around this, partners set up multiple firms with the same name, which Icai allows. Price Waterhouse, for instance, has numerous partnerships under the same, or slightly altered, name.
Which brings us to the present dilemma. CBI says the auditor who signed off on Satyam’s books belonged to a Price Waterhouse entity that was not the official auditor. That may well amount to a legal transgression. But Icai seems to be using one company’s mistake to begin a witch-hunt against the “Big Four”, the large globally affiliated accounting partnerships.
Local unaffiliated accountants have never been happy with the market share stolen by these powerful foreigners. Satyam now provides a vent to rail against them. Icai’s role in the matter seems suspect: It serves as both the accounting regulator and the industry association representing members. But when Icai is asking for disclosure of a company’s global relationship, including details of fees, profits and remittances—information already provided to other regulators—is it Icai the regulator or Icai the lobby that is interested?
Amid this conflict of interest, Icai can inject more minutiae into its regulations that only furthers protectionism.
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