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A failure of self-regulation

A failure of self-regulation
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First Published: Thu, May 05 2011. 01 15 AM IST
Updated: Sat, Jul 02 2011. 03 43 PM IST
Ask a simple question in India and the answer trail leads to muddled policy that has roots in vested interests. The news broke this week that PriceWaterhouseCoopers, the auditors of Satyam Computer Services Ltd, paid $25.5 million to compensate investors who suffered losses due to PwC (in the words of the Securities and Exchange Commission) “failing to comply with some of the most elementary auditing standards and procedures.” Investors compensated include the Public Employees’ Retirement System of Mississippi, Britain’s Mineworkers’ Pension Scheme, Norway’s Skagen AS and Denmark’s Sampension KP Livsforsikring A/S.
Investors across the world have been compensated, but no Indian investor has got a rupee of compensation. Why? The answer can be given in four parts. First, the regulator, the Institute of Chartered Accountants in India (Icai), has the power to haul up individuals and not firms. The Icai Act will need a change for the firms to get regulated by it. Two, not one mutual fund has taken PwC to court. Third, the investor association, Midas Touch Investor Association’s Rs.5,000 crore compensation case against PwC (among others) was thrown out of consumer court due to lack of jurisdiction. Four, the Securities and Exchange Board of India (Sebi) case against PwC is in high court and will take some time to be decided.
Globally audit firms are regulated by independent audit regulators since self-regulation does not work in the real world. India, by sticking to the self-regulatory model, is set up for market failure. Free markets work with regulators setting the rules, certification agencies and auditors verifying and certifying that the companies are not lying. In the absence of any of the three not working properly, there is market failure. Strong lobbying by the big four audit firms in India has ensured that the independent regulatory body idea has been scuttled at various points in the last few years. We are set up for more such events.
India needs to do two things, quickly. One, set up an independent auditor for audit firms and quickly become a member of the International Forum of Independent Audit Regulators (IFIAR), the global body that sets standards. Brazil, Singapore, Sri Lanka, the US, the European Union, and the UK are members (https://www.ifiar.org/aboutus/index.cfm) and are setting global standards in the form of core principles. India needs to be on that high table today, rather than 20 years later. Two, a strong investor association is needed that will use a strategy based approach to fight for investors’ rights.
What ails the regulation of audit firms? Tell us at views@livemint.com
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First Published: Thu, May 05 2011. 01 15 AM IST
More Topics: Ourviews | Sebi | Audit | PwC | Icai |