Financial Tech: Deloitte washing its hands of a Rs 5,500 cr scam

By S Murlidharan

The auditor of Financial Technologies India Ltd (FTIL), the holding company of the National Spot Exchange Ltd (NSEL), Deloitte Haskins & Sells has withdrawn its audit report dated 30 May 2013 on the company’s financial statements for year ended 31 March 2013. For withdrawing the report, the auditor has cited the purported crisis at NSEL.

Deloitte has taken shelter under Standard on Auditing 560 (SA) issued by the Institute of Chartered Accountants of India (ICAI). This standard deals with subsequent events i.e. the events that happened between the balance sheet date and the date of audit report.

In the first place, the payment crisis at NSEL was by no means a subsequent event as defined in the SA. It took place well after the date of auditors’ report though the crisis can be given a liberal interpretation as having happened subsequent to the balance sheet date.

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What is more worrying, however, Deloitte’s strident disavowal of the audit report to the point of asking users of accounts not to rely on it. The SA simply does not allow this escape route to the auditors.

[caption id=“attachment_1132425” align=“alignleft” width=“380”]  Jignesh Shah’s Financial Tech owns NSEL which is undergoing a Rs 5,500 crore payment crisis. Reuters[/caption]

Instead it asks the auditor to give a negative or qualified report if the directors of the company refuse to incorporate the significant happenings between the balance sheet date and the date of auditors’ report having a bearing on the truth and fairness of the financial statements under review.

Deloitte obviously is shaking in its boots. It knows the auditors of Satyam, PricewaterhouseCoopers, allowed grass to grow under their feet or looked the other side even as Satyam’s promoter Ramalinga Raju merrily went on boosting sales through fictitious invoices.

For a similar fraud in the US involving the energy major Enron, its auditor Arthur Andersen had to pay a heavy price as it was blacklisted. The company had to resurrect itself with another name, Accenture.

But the Indian authorities do not seem to have taken any action against PricewaterhouseCoopers itself even though the responsible (or irresponsible?) partners have been sufficiently upbraided.

Deloitte is seeking to initiate damage minimising measures but sadly those measures are designed to save its own skin and not protect the interests of various stakeholders evincing interest in accounts and auditors’ report thereon. Time alone will tell whether this rearguard action was enough to save its skin.

An auditor cannot pull punches. He cannot withdraw an inconvenient report, as it were. Deloitte obviously believes that the seeds of NSEL’s possible misdemeanours were sown long back, well during the financial year 2012-13 or even earlier. It thinks by disowning its audit report and by extension the accounts for that year it would have pulled its chestnut out of fire. But this simply is not on. It knows that it really cannot take shelter under SA because what has happened to warrant the withdrawal of audit report is not strictly a subsequent event.

Even if it is one, the SA does not authorise the auditor to withdraw his report pusillanimously. Instead it asks the auditor to qualify his report or give a negative report. Deloitte knows it can do neither now that the report has already been given. Hence this resort to pusillanimity.

There is another publication of the ICAI-Guidance Note on Revision of Audit Report. It makes it categorical that under no circumstances should an auditor withdraw its report because in that case the very edifice and foundation of auditing would be shaken-people would lose faith in auditing.

Already the profession of auditing as well as credit rating is going through a crisis of confidence born of less than exacting quality of work bestowed on the work of auditing and rating. Withdrawal of report would further aggravate the NSEL crisis-it has thus far paid only Rs 148 crore to investors numbering about 13,000 out of Rs 5,500 crore it owes them.

The guidance note, to be sure, allows the auditor to revise its report for mistakes that might have crept in inadvertently or due to subsequent events throwing fresh light on the balance sheet. But it takes care to reiterate that revision of report does not condone professional negligence.

Deloitte knows that it would have fallen foul of the guidance note as well which frowns upon the pusillanimous act of withdrawal of audit report. They also know that revision of audit report would warrant a deep and invasive surgery to accounts themselves given the extent of the malaise.

The more honourable course therefore would have been to press for revision of accounts themselves which indeed is permitted in extraordinary circumstances as conceded by the Guidance Note. One wonders why Deloitte has not explored this option. May be it has but thought it prudent to withdraw the report meanwhile and drop the disagreeable accounts like a hot potato.

The Guidance Note also exhorts the auditor to take the even more honourable course of exiting and severing its ties with the entity if the management is intransigent to owning up the mistakes.

But the big firm of accountants simply do not like to lose its clients. They cling on to them leech-like. It is easy to disown a report but difficult to disown the client itself especially if the client promises to lay golden eggs for times to come.