The Hindu : Corporate governance and integrity of audit firms

Online edition of India's National Newspaper
Friday, Aug 09, 2002

Opinion

Opinion - News Analysis

Corporate governance and integrity of audit firms

By Oommen A. Ninan

MUMBAI, AUG. 8. Corporate governance and integrity of audit firms are a matter of discussion for India Inc. too. This time it is the case of Tata Finance and its audit firm A. F. Ferguson & Company as the auditor's report on irregularities in the company was withdrawn under controversial circumstances. It got a new twist on Wednesday with the audit firm's senior partner, Y. M. Kale, and his three-member team which prepared the report having resigned.

While Tata Finance Chairman, Ishaat Hussain, stated that the company had not resorted to any pressure tactics on the audit firm to withdraw its report, he admitted that A. F. Ferguson had withdrawn the report following the reservations expressed by the board of Tata Finance on the conclusions of the report. It is also reported that the audit firm's report criticised the quality of corporate governance in Tata Finance which led to the firm running up huge losses.

Ferguson was enlisted to probe the Tata Finance muddle which rocked the Rs. 50,000 crore Tata group last year. The Tatas had filed police complaints against the former Managing Director of Tata Finance, Dilip Pendse, and others since August 2001, charging them of criminal breach of trust, forgery, falsification of accounts and cheating. There are also complaints against Mr. Pendse on violation of SEBI (Insider Trading) Regulation 1992 and Reserve Bank of India Act 1934's Sec.451A. The Tatas also filed civil suits against Mr. Pendse and others on illegal and unauthorised transactions. Last year, Mr. Pendse was sacked for these alleged transactions which brought huge losses for Tata Finance. The company's reservation on the Ferguson report stemmed from the fact that it omitted some crucial statements which provided evidence against Mr. Pendse and others. Another view is that instead of pinning down certain individuals, the audit firm's enquiry alleged questionable inter-group transactions intended to help certain group companies with the blessings of a large number of board members of Tata Finance, including its vice-chairman, Kishore Chaukar. While so much are facts, there is an obvious issue of conflict of interest, which is emerging from all these developments; A. F. Ferguson & Company is the statutory auditor for many Tata companies, including, Tata Power, Tata Steel and Tata Engineering.

Another school of thought believes that this is a special assignment entrusted by the Tata group to A. F. Ferguson & Company. As Ferguson is not the statutory auditor of Tata Finance, the assignment involved — to the extent as known from the news reports that investigations into the matters of certain irregularities were noticed — something of an investigation into the facts and record of Tata Finance. "Therefore, neither party perceived there to be any conflict of interest," said N. V. Iyer, Co-Chairman, Deloitte Haskins & Sells.

What happens is that normally a report once submitted is in the nature of a final report contains fact findings and professional conclusions. There can be situations though exceptional that some new facts or additional evidence may surface after an assignment is done. In such a situation, the two parties to the assignment may have a dialogue and request for the additional facts or evidence to be examined and to validate any of these findings or opinions. "In these circumstances, it is open to the firm to withdraw the report and submit fresh findings after assessing the additional facts or evidence," Mr. Iyer substantiated. This is a parallel to even a statutory audit where an auditor submits the report to the shareholder but still holds office until the conclusion of the annual general meeting where the annual accounts and the auditor's report are adopted.

There can be circumstances where fresh evidence may come to the knowledge of the auditor before the accounts are adopted in which case the auditor will evaluate the necessity to either withdraw his earlier opinion or make supplementary observations for the consideration of the shareholders. So it is not unusual that a firm of accountants may wish to withdraw a report on the basis of additional evidence which may be subsequently discovered. Therefore the Company Law under Sec. 231, provides a statutory right to the auditor to attend a general meeting and to be heard at such meetings.

Even by the rules of corporate governance, there is an increasing trend to have independent director on the boards of listed companies. Independent directors are defined as people not having a pecuniary relationship with the company or the promoter group as may influence their decisions. Said Mr. Iyer, "So non-executive directors have a collective responsibility in the conduct of board meetings and exercise collectively through the board the powers of supervision, direction and control of the management".

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