Tag: PricewaterhouseCoopers

The Shadow Government Plundering the Public Purse

The drive to privatise everything has led to consultants taking on the work of public servants. But at what cost?

The controversy surrounding PricewaterhouseCoopers (PwC) has many asking whether the hundreds of millions of dollars government departments spend on consultants each year is the best use of public money.

PwC is under intense scrutiny after it was alleged the firm misused confidential government tax information for commercial gain.

It is alleged that, after the firm advised the government on tougher tax laws, it then leaked the design of those laws to its clients – many of whom would be targeted by the proposed laws.

This is not the first time these kinds of questions have been raised.

Three recent examples of this issue being explored include the Thodey review of the Australian Public Service, a 2017 Australian National Audit Office audit of Commonwealth departments’ use of consultants and contractors, and a 2014 audit by the Victorian Auditor-General’s Office.

You could be forgiven for dismissing this matter as an insider issue of public administration best left to the boffins to thrash out.

However, as the PwC scandal illustrates, the excessive use of consultants has very real implications for democratic decision-making.

Indeed, many experts argue the influx of consultants represents a shadow government that is plundering the public sector. Some go so far as to say that it represents private control over public policy.

It is therefore timely to consider why governments use consultants so much, why that might be a problem, and what we can do about it.

The consulting industry can be traced to the father of so-called ‘scientific management’, Frederick Winslow Taylor, and his cohort of ‘efficiency engineers, which included such business luminaries as Henry Gantt, Lillian and Frank Gilbreth, and Harrington Emerson. This group could be considered the first management consultants.

They were involved in advising the United States’ government on matters of efficiency, administration, or organisational design.

In the US, for example, the Hoover Commission in 1947 hired two consulting firms to provide advice on reforms to public administration. Likewise, political scientist Denis Saint-Martin has described the 1960 Canadian Glassco Commissionon Government Reorganisation as ‘by far the most impressive demonstration of the influence of consultants in government’

Consultants received a massive ‘shot in the arm’ through the introduction of a bundle of reforms collectively known as the new public management. This introduced into government:

  • ‘Hands on’ professional public management;
  • Explicit performance measures;
  • Emphasis on ‘output controls’;
  • Competition in the public sector;
  • Disaggregation of units in the public sector;
  • Stress on private sector styles of management practice.

After its introduction, spending on consultants increased dramatically. In the UK, spending on consultants by the Department of Defence from 1993 to 2006 increased from £55 million to £256 million. Over the same period, spending by the Home Office increased from £3.81 million to £125 million – a change of 3,190%.

New public management was introduced in the 1980s when the economic ideas of UK Prime Minister Margaret Thatcher and US President Ronald Reagan held sway. It represented a victory of private sector ideology over the public.

Ronald Reagan with Margaret Thatcher. Photo: Unknown photographer/Wikimedia Commons, Public domain

The underlying logic was that the private sector knows best.

Private sector management techniques were hypothetically introduced to produce better public sector outcomes. Whether new public management has done this or not remains a heated point of debate. At the very least, it has created an environment in which consultants can thrive.

It’s also been a major contributor to the loss of expertise in government. As Professor Rod Rhodes described it many years ago, the state has been ‘hollowed out’.

As a result, governments have turned to consultants more. However, this meant that public servants were not doing the necessary work to upgrade their skills and increase their expertise. The consultants were gaining that expertise and – for a fee – providing their advice to bureaucrats.

Reliance on consultants became more and more entrenched, so now we are in a situation where consultants are seen as a ‘shadow’ public service.

The presence of consultants on its own is not a problem. Decision makers throughout the ages have turned to advisors to assist with pressing challenges. Besides, the nature of governing today is far more complex than it was even a few decades ago.

It is prudent, therefore, to turn to a range of different sources for advice – including consultants. And there are situations where very highly specialised or technical knowledge is required to support public decision-making.

While the principle of consultants being part of governing today is sound, it is the practice that is a problem.

There are four parts to this problem: definition, quantity, management and procurement.

The problem of definition relates to the public sector’s understanding of what consultants are and what they do.

There is confusion as to how consultants differ from contractors and, as a result, how best to deploy them. This issue is fundamental to the nature of work that consultants are asked to do and how governments report on the extent of consultancy spending .

It means work more appropriately classified as a contractor can be recorded as a consultancy (and vice-versa). It also means departments can pay a premium for the services of a consultant when a (much cheaper) contractor would suffice. It also might result in contractors putting up sub-standard work, thereby damaging the reputation of consultants generally.

The problem of quantity relates to how often governments use consultants.

The Victorian Auditor-General’s Office recently estimated that the current Labor Government has spent (on average) AUD$140 million on consultants each year over the past five years. If we assume that the average cost of a consulting project is AUD$100,000, then that is 1,400 consulting projects across the state government — roughly 140 per department per year.

While large, this pales in comparison to the United Kingdom’s spend: £2.8 billion worth of consulting work in 2022 alone.

The problem of quantity is not just about ‘how much’. It is also about ‘who’.

The bulk of consulting work is often awarded to the so-called ‘Big Four’ – KPMG, Deloitte, PwC and Ernst & Young. The sheer volume of work, compounded with the awarding of work to a select group of firms, suggests the government is dependent on these specific firms. One UK official even warned others about getting ‘addicted to having well trained, hard working people running around’.

The management problem relates to poor supervision of consultants.

Department officials sometimes see consulting work as ‘set-and-forget’, meaning they don’t actively manage or take ownership of the process or the results. This may result in something that is not fit for purpose, meaning additional spending might be necessary to rectify a report or unwanted outcome.

Consultants can often be put in a position of power over their clients where the client does not necessarily understand the work the consultant is doing. Ideally, a consulting project should be co-owned by the bureaucrat and the consultant.

The issue here is that bureaucrats end up defaulting to a consultant when internal staff might be more than capable of doing the work.

In addition, the insecurity of public sector work can sometimes mean consultants themselves become the keeper of institutional memory. If the right structures aren’t put in place, this can mean the expertise of the public sector is further eroded and the presence of consultants is made more necessary.

Finally, there is the problem of procurement. The traditional model assumes consulting services can be purchased just like any other good. However, the reality of purchasing consulting services is very different from, say, purchasing a piece of infrastructure. Consultants are often in relationships of co-dependency with government officials.

These relationships transcend individual transactions. However, the way in which procurement is practised often disguises these relationships, thus creating challenges in holding consultants accountable.

Accountability issues are further compounded given that consultants can often hide behind commercial-in-confidence privileges.

To address this issue we first need to rebuild the policy capacity of the public service.

Consultants should only be called in when a task requires a highly specialised form of knowledge combined with a deep understanding of, and relationships with, the specific sector.

In the short term, consultants could be required to upskill the public service in their processes and methodologies. As this research demonstrated, this does happen, though it might not be common practice.

Internal consulting divisions within the government are a possibility. Interestingly, Australia’s current Labor Government has committed to doing just that at the same time as the UK Cabinet Office is shutting its down due to lack of effectiveness.

But the real piece of work is long-term generational change.

A career path for public servants and considering policy work a genuine profession can help.

This could involve better links between the public service and universities. It could see public departments define workforce needs and talk to universities directly about how those needs can be filled. It could consider public policy knowledge a genuine form of professional knowledge in its own right – similar to law or accounting.

This is going to require several years to get right. Largely because Australia is now trying to wind back several decades of neoliberal ideology – not something that can be done overnight.

Public servants could be trained in the best ways to work with consultants. On the flip side, consultants who want to work in government services could be required to undertake a professional accreditation that demonstrates they understand the important contextual differences between the public and private sectors.

In addition, procurement rules can be updated to remove the category of ‘consulting’ altogether. It causes too much confusion. Rather, categories could be based on the type of expertise that is actually being purchased.

For instance, governments often purchase evaluation services, but ‘evaluation’ is not a recognised category in AusTender. Likewise, strategy advice or analytics are commonly-provided consulting services but are typically subsumed under the much broader category of ‘Management and Business Professionals and Administrative Services’.

These very high-level categories can obscure as much as they reveal.

The approach to procurement and the procurement rules applicable to consultants could also be overhauled to recognise the fundamentally relational – not transactional – ways in which consultants enter the public sector.

Forms of ‘relational contracting’ would be investigated to allow for more transparency in the ways consultants are used.

Consultancies could be subject to a set of ethical rules and professional standards. Consulting doesn’t ‘look like’ any other profession. There is no academic qualification, no professional standards, and no regulatory body for the profession.

In short, anybody can set up shop and call themselves a consultant. Addressing this issue would go a long way to ensuring money is spent appropriately and is providing quality outcomes to government.

There is a role for consultants to play in modern systems of government.

At the same time, a lot needs to be done to ensure that we can rein in some of the excessive public expenditure on private forms of advice.

While there are several ideas that could be implemented in the short term, the real ‘fix’ is moving away from ideologically privileging the private sector to recognise the unique value that public policy analysis and public servants can provide.

This isn’t just a structural reform but a shift in perspective and culture. We can’t unscramble the omelette, but we can certainly make it taste better.

Dr Marty Bortz is an Honorary Senior Fellow at the Melbourne School of Government at the University of Melbourne. He has worked in local and state government, and private consulting, across multiple portfolios including education, health, justice and Indigenous affairs.

Originally published under Creative Commons by 360info.

Exclusive: Audit Found Glaring Discrepancies in Maharashtra Recruitment Exams Under Fadnavis

PwC found that the two private companies hired were not only technically incompetent but also had compromised on processes, making the exams a complete sham.

Mumbai: The mega recruitment drive carried out by the MahaIT, a Maharashtra government entity set up by the Devendra Fadnavis regime, was full of glaring discrepancies right from its inception in 2017.

A private audit firm, PricewaterhouseCoopers (PwC), first engaged in 2018, had found that a US-based IT company named ‘UST Global’ and Indian company ‘Arceus Infotech Private Limited’ – which had bagged the contract to carry out exams for MahaIT’s MahaPariksha portal – had failed on almost all counts during the “process” and “technical” review. The audit was carried out for the exams conducted in 2017 for 15 different government departments and with over 10 lakh aspirants applying. It showed that the two companies were not only technically incompetent but also had compromised on the processes, making the exams a complete sham.

The audit was carried out in early 2018 and on submission of the report, MahaIT had claimed to have “rectified” the process to ensure such problems don’t plague the system any further. However, The Wire’s report on October 25 and several other evidence that has emerged since have shown that despite glaring issues in the exam process for class III and IV posts, MahaIT neither made any substantial changes to the system nor found an alternative to conduct these exams in a foolproof manner. In the following years, in fact, the extent of irregularities and rampant misconduct only increased in 2018 and 2019, The Wire’s investigation had shown.

The pattern and extent that has emerged are comparable to that seen at the Madhya Pradesh Professional Examination Board, more commonly known as the Vyapam scam.

It was only after the BJP government fell in the state and the Maha Vikas Aghadi government – a coalition government of the Shiv Sena, Nationalist Congress Party and Congress – took charge in Maharashtra, that the exam process was completely scrapped and the private firms sidelined. The government, right now, is in the process of introducing a new OMR process and around 18 companies have participated in the bidding process.

Under the process review, the PwC audit had considered 43 different aspects, all of which were marked under the “high risk” category. Processes or gaps requiring “urgent action” have been categorised as high risk, and any delay in rectifying it, PWC states, would lead to “significant financial impacts”. Similarly, of the 14 aspects evaluated under the technical process, 10 fell under the “high-risk category”. Three others were categorised as “medium risk” and only one as “low risk”. Application and network security too were evaluated in this audit and the MahaPariksha portal fared poorly under most parameters.

Also read: Exclusive: Under Fadnavis’s Watch, a Vyapam-Like Scam Flourished in Maharashtra

Among some of the glaring issues flagged by the PwC in this audit include failure to obtain approval from MahaIT to approve the standard operating procedure (SOP) to conduct online exams and approval before subcontracting the work to a third party (in this case, to UST Global and Arceus Infotech). Most crucial among them all is the observation made about the failure to follow “system-based (random distribution) appointment” of invigilators and exam coordinators leading to “chances of copying”.

Other specifications like two-feet spacing between two candidates and security controls at the exam centres were not followed, causing high chances of copying and leaking of question papers in most exam centres. “Security personnel were not available at five out of seven test centres (randomly) visited by us to prevent the entry of unauthorised person in the exam centre and exam hall,” PwC has observed in its audit report. This, particularly, is a very serious observation, considering hundreds of students and even administrative officials including the then Ahmednagar collector, Rahul Dwivedi, had flagged similar issues.

Both UST Global and Arceus Infotech, known for its technological and logistical expertise, were hired to carry out a seamless exam process. Even the slightest glitch in the process could compromise the entire recruitment exercise. This is particularly serious as between 2017 and 2019, the MahaParikha portal was to decide the fate of 38.5 lakh aspirants who had applied for 30,000 vacancies across 25 departments in the state.

Government documents indicate that UST Global and Arcues Infotech were fined Rs 48 lakh in 2018 and Rs 52 lakh in 2019 for not fully complying with the clauses included in the tender. Towards the end of 2019, PwC was once again engaged to audit the last set of exams conducted by MahaPariksha. While sources in PwC claim that these findings are a lot more damning, the report has not been handed over to the state government due to several outstanding bills to be paid to the audit firm.

Several candidates have levelled allegations of rampant exam fraud in Maharashtra. Illustration: Pariplab Chakraborty

Not just the lack of expertise, the audit report has also pointed at the consortiums inability to understand the most basic requirements of the examination, including selection criteria, quality of questions and failure to carry out peer review of question sets used in the exams.

Sources in MahaIT have said that despite the clear terms mentioned in the contract that the propriety of the data would remain with the department, the data ownership has remained with the private players. This was reiterated in the PwC audit findings, which have stated that the ownership of data remained with the vendors, leading to the “possibility of exploitation of critical and sensitive data present in the database including user information, questions banks and results”. Similarly, the vendors disregarded the data security of students, the report points out.

Since these exams are conducted in different batches and multiple question sets are used, normalisation of the process is needed. Under this, values measured on different scales are adjusted to a notionally common scale. The process allows the performance of candidates to be evaluated on the basis of similar parameters. Several court and government orders have asked for its strict implementation. Even the contract signed between the MahaIT, UST Global and Arceus Infotech had mentioned normalisation as one of its prerequisites, but the PwC report states that the “difficulty levels of the exam paper are not consistent with the requirement specified in the business requirement document”. The report further states that such inconsistencies may lead to “very easy to very difficult papers for different slots, causing discrimination to the students enrolled for a given exam”.

Also read: The Wire Impact: Maharashtra Government To Probe Recruitment Scam

Each year after the exam, the MahaIT department would be inundated with students’ complaints ranging from wrong markings, paper leaks and malpractices at exam centres. Over a dozen cases are pending before several administrative tribunals and different benches of the Bombay high court. In some cases, the courts have already given orders favourable to the students, but the government is yet to act upon these orders. For instance, a 29-year-old candidate, Nilesh Gaikwad, a BTech graduate from Buldhana district who appeared for a revenue officer’s post in Ratnagiri district and scored 172 marks, falling just two short of the cut off, has made several complaints to MahaPariksha. His contention is that he has been wrongly marked for at least one answer, making him lose the post.

Similarly, two other aspirants – one belonging to a Denotified Tribe and another from an OBC community – from Yavatmal district lost the posts of accountant and auditor in the urban development department for a meagre one mark each. The applicants had moved the Maharashtra Administrative Tribunal (MAT) contending that he was wrongly marked and the tribunal, after going through the evidence, had accepted his contention. While the court has passed a favourable order, the candidates are yet to be given the jobs.

These are not just a few stray instances and acquire greater importance considering that the subject-matter experts (SME) recruited to set question papers lacked expertise. The audit report clearly states that in most cases, while appointing the SMEs, no educational qualification was specified, especially in the case of computer science, social studies and gardening. They, in turn, were responsible for setting up “sub-standard” quality questions, the report observes.

Nirmala Sitharaman Seeks Anti-Trust Whip on Global Firms Abusing Dominance

Last month, the government was looking to assess whether the “big four” auditing firms were hurting competition in any way.

New Delhi: Union finance minister Nirmala Sitharaman on Friday asked the country’s anti-trust regulator to take action against global companies having no local presence but abusing their dominant position against the interests of consumers.

Last month, a senior government official had said that the government wanted the country’s antitrust body to assess whether the so-called “big four” auditing firms – PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG – and their affiliates were hurting competition in any manner.

Also read: Weak Growth Is Highest Priority: RBI Policy Minutes

“Competition Commission of India (CCI) should take suo motu cognisance of global companies having no presence in India but abusing Indian consumers,” Sitharaman said at an event in Delhi on Friday.

She said efforts should be made so that the domestic companies do not face abuse of dominance from global companies.

(Reuters)

Is the Modi Government Serious About Stemming the Rot in India’s Audit Industry?

The current ‘affiliate’ model practiced by big audit firms needs to be questioned from multiple angles.

India’s ministry of corporate affairs (MCA) must be complimented. Not for creating the illusion that it is taking swift action against errant auditors, especially in the case of IL&FS Financial Services (IFIN),  but for smartly obfuscating the real issues and camouflaging its own complicity in the financial mess that is unravelling slowly. 

The little noise that it is making now – which will also fade eventually as happened in the case of the 2009 Satyam scandal – is only to divert attention from its own failing in preventing some big multinational firms from blatantly violating various regulations. 

Initially, it was reported that the MCA had sought a five year ban on Deloitte Haskins and Sells and BSR & Co.( part of KPMG network). This was on the back of a report of the Serious Fraud Investigation Office (SFIO), an arm of MCA, which alleged that the auditors colluded with the management to conceal information about ever-greening of  bad loans, diversion of funds, falsifying accounts, etc.  

Initial indications from MCA suggested that all network firms of the erring auditors would be banned for five years to act as a strong deterrent. 

Also Read: India Can’t Clean up its Financial System Without Breaking the Business-Auditor Nexus

The ministry now appears to be back-pedalling, in part at least. Recent reports suggest that the ban may not affect all their network entities or even their lead partners. If this is indeed the case, then the whole exercise would be a waste of taxpayer money.  

Generally-speaking, auditors are partners in more than one firm. Even otherwise, there is nothing to stop the errant audit partners from migrating to another firm or from starting start a fresh firm within a day. All business can then be diverted to the other or new firms. Banning only a particular firm is largely meaningless.

Main issue swept under the carpet

The fundamental issue that no one is talking about is that extant provisions of the Chartered Accountants Act, 1949 (CA Act) do not permit foreign partnership firms to engage in auditing.

How then are there so many audit firms are operating as “affiliates” or “network firms” of multinational accounting firms (MAFs)? Several allegations have been made over the last three decades against some allegedly clandestine operations but regulators have chosen to ignore them.

An elementary pre-requisite for enhancing ease of doing business is clarity on laws.

If foreign equity and management control is indeed allowed in auditing firms, then why are so many audit firms including the  likes of S.B. Billimoria & Co, A.F. Ferguson & Co., Dalal & Shah, C.C. Choksi & Co., etc. forced to operate as “affiliates” or “network firms” of the Big Four? Why aren’t foreign audit firms  allowed to hold an equity stake in their Indian affiliates if there is no such prohibition?This appears to be extremely unfair to the Big Four. 

The only hitch: extant regulations do not permit even indirect equity or management control of Indian audit firms by persons not resident in India. However, this prohibition has been flouted by some in the past, with the Institute of Chartered Accountants of India (ICAI) and MCA often making very little fuss.

How then are there so many audit firms are operating as “affiliates” or “network firms” of multinational accounting firms? Photo: Pixabay

CA Act

One  unambiguous and uncomfortable legislation that comes in the way of the Big Four operations in India is the Chartered Accountants Act, 1949 (CA Act). The CA Act was meant to regulate, in public interest, the profession of chartered accountants by the ICAI. Section 25 of the CA Act prohibits any company, whether incorporated in India or elsewhere, to practice as chartered accountants. 

Another stumbling block is Section 29 of the CA Act which governs reciprocity.  Since Indians are not allowed to practice as auditors in countries like UK, USA, France, Germany, Netherlands, Italy, Hong Kong, Singapore, Spain, Mauritius etc. etc., no subject of any such country is entitled to become a member of the ICAI or practice the profession of accountancy in India. 

Moreover, pursuant to provisions of Section 2, 4 and 7 of the CA Act, only persons who are registered with the Institute qualify as members who are competent to practice the profession of Chartered Accountancy in India.

FEMA Regulations

Another stumbling block is the extant Foreign Exchange Management Act regulations. No person resident outside India can make any investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India without prior RBI  approval.

In simple terms, what the above legislations mean is this: No foreign resident nor any company (Indian or foreign) can practice as chartered accountants or invest in any audit partnership firm in India. 

This raises interesting questions regarding the current ‘affiliate’ arrangement that the Big Four practice in India. For instance, why would they allow their brand to be used, and exposed to potential liability, by Indian audit firms without being able to exercise adequate management control? 

Management control is certainly lacking, at least in spirit, due to the above-mentioned prohibitions on investment. Does this hodge-podge of a situation provide incentives for secretive arrangements? 

Extant laws, irrespective of whether they are good, bad or outdated, must be respected. The settled position in law is that what is prohibited directly is certainly not allowed to be done indirectly.  If the law is bad or out dated, nothing prevents the government from having a relook. But till any amendment takes place, the sanctity of the existing law must be respected in letter and spirit.

Blame games continue

In the aftermath of the Satyam scam, a high-powered expert group constituted by the ICAI had submitted a report dated July 29, 2011 which highlighted various violations of the CA Act by multinational accounting firms. Several meetings have reported to have taken place since then between ICAI and MCA, but with no concrete outcome.

Both ICAI and MCA have historically shifted responsibility from one to the other over taking action against multinational accounting firms. After all, who wants to kill the goose that lays the golden egg?

There are small hints that the MCA has now gone one step further. It has indirectly pointed a finger at the alleged indifference of the Reserve Bank of India (RBI) on IFIN for not meeting the basic criteria on the CRAR (Capital-to-risky Asset ratio) and NOF (Net owned Funds) fronts. 

Little wonder then that many audit firms have continued to flout the system for several decades and are even now getting away with it. The corporate affairs ministry is now forced to make some noise now because of the humongous proportions of IFIN scam and  to deflect attention from its own failure to implement the law.

Worried or not?

In the meanwhile, what is India’s finance ministry doing? Deloitte’s global CEO, Punit Renjen, is reported to have met top North Block officials in early June 2019 to dissuade them from imposing a ban. He also reportedly cautioned our big babus of the negative impact that the ban could have on financial markets, inflow of foreign direct investment and so on. 

It is unclear what locus standi he had to represent the Indian affiliates of his international network, given that they have no equity control in them. If he did it by virtue of the network’s management and operational control, then he was taking a big risk.

Also Read: PWC Quits as Statutory Auditor of Anil Ambani-led Reliance Capital, Reliance Home Finance

One accounting scam in the US, the Enron scandal, was enough to eliminate Arthur Andersen worldwide.  

However, in India the Big Four are assured that notwithstanding the multiple scams that they have been alleged to be involved in, it will be business as usual, if not better. 

India Inc’s biggest accounting scam, the Satyam Scandal, came to light in January 2009. The SFIO had in April 2009 submitted a report that pointed towards the falsification of accounts and concluded that two PriceWaterhouse auditors were complicit in the fraud. The Supreme Court had fixed July 31, 2011 as the deadline for completing the trial. The special CBI court finally gave its verdict on April 9, 2015, almost  6 years after the fraud came to light. It handed out seven-year jail terms to Raju and nine other accused including the two PriceWaterhouse partners.

Satyam founder B. Ramalinga Raju. Photo: Reuters

Barely a month later, a metropolitan sessions court in Hyderabad granted bail to Satyam Computers founder B. Ramalinga Raju and nine others and suspended their seven-year rigorous imprisonment. 

Since then, no one including  the MCA, has deemed it fit to challenge the order of the session court. Surprisingly, neither have those convicted by the Special CBI court have moved the higher courts to have their names cleared.  

In short, no one seems to be interested in taking things to their logical conclusion. 

It took SEBI more than seven years to ban network firms of Price Waterhouse and order disgorgement of wrongful gains of some Rs 13 crore. This amount, which may appear to be big, is actually a pittance when compared to the estimated hundred-crore annual pay-outs to the partners in each of the Big Four.

Instead of banning the entire network as was done in case of PwC, MCA appears to be set to dilute its stand in case of IFIN as stated above. At the most, it may levy a petty monetary fine on Deloitte and KPMG network firms. 

At a recent Confederation of Indian Industry (CII) event, a senior union minister was reported to have exhorted senior lawyers and representatives of the Big Four present there to follow the law in letter and spirit or face serious consequences. A pep talk from him to the MCA may go a long way in realising the cherished desire of Prime Minister Narendra Modi to see at least four Indian firms amongst the Big Eight by 2022. 

Sarvesh Mathur is a senior financial professional, who has worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.

Appoint Expert Committee to Probe Functioning of Multinational Accounting Firms: SC to Centre

It seems that the MAFs are complying with statutory provisions and policy frameworks only “in form and not in substance”, the bench said.

It seems that the MAFs are complying with statutory provisions and policy frameworks only “in form and not in substance”, the bench said.

The committee will have to submit its report within three months of being constituted. Credit: PTI

The committee will have to submit its report within three months of being constituted. Credit: PTI

The Supreme Court on Friday directed the Centre to constitute within two months a committee of experts in order to look into the functioning of the multinational accounting firms (MAFs) in India. This committee would have to submit a report on the issues highlighted by the court within three months thereafter.

The bench comprising Justice A.K. Goel and Justice U.U. Lalit was hearing an appeal demanding investigation against MAFs and Indian chartered accountancy firms (ICAFs) having and arrangement with such MAFs, for breach of Code of Professional Conduct under the Chartered Accountants Act, 1949. This appeal had been clubbed with another petition demanding similar reliefs. The issue raised in both matters was:

“Whether the MAFs are operating in India in violation of law in force in a clandestine manner, and no effective steps are being taken to enforce the said law. If so, what orders are required to be passed to enforce the said law.”

The allegations

The appellant had alleged that MAFs were illegally operating in India, in violation of Section 224 of the Companies Act, 1956, Sections 25 and 29 of the CA Act, and the Code of Conduct laid down by the ICAI.

The PIL, argued by advocate Prashant Bhushan, had alleged malpractices by leading MNC auditor PricewaterhouseCoopers (PwC). The petition had alleged that PwC and its network audit firms operating in India had indulged in infusing foreign money in violation of the FDI norms, engaging in illegal accounting insurance policies and acquiring another auditing firm irregularly. It was, therefore, accused of violating various provisions of the FDI policy, Reserve Bank of India (RBI) Act and the Foreign Exchange Management Act (FEMA).

The petition had then demanded that falsification of accounts be made a non-bailable offence to ensure effective governance and to avoid potential loss of revenue to the public exchequer. It had further demanded that an independent regulator be appointed for auditors and that allegations against PwC be investigated into.

High powered committee expert group report

This committee had made various recommendations, including action to be taken against firms which share revenue with multi-national entities and those which receive financial grant from multinational entities in spite of this being prohibited. It had further recommended that it should be made compulsory for all firms which enter into any kind of arrangement with a foreign entity to disclose such arrangement every year to ICAI.

Furthermore, it had suggested that no MAF should be allowed to directly or indirectly operate in India without specific approval of the ICAI’s council. It had also emphasised on the need for a ‘no objection’ from the ICAI and the RBI for MAFs to engage in audit and assurance services in India.

The logo of accounting firm PricewaterhouseCoopers (PwC) is seen on a board at the St. Petersburg International Economic Forum 2017 (SPIEF 2017) in St. Petersburg, Russia, June 1, 2017. Credit: Reuters/Sergei Karpukhin

The logo of accounting firm PricewaterhouseCoopers (PwC) is seen on a board at the St. Petersburg International Economic Forum 2017 (SPIEF 2017) in St. Petersburg, Russia, June 1, 2017. Credit: Reuters/Sergei Karpukhin

Statutory provisions

The court considered various statutory provisions and inter alia noted that while Code of Conduct for CAs prohibits fee sharing and advertisements, MAFs violate this code by “using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy”.

It then observed that it prima facie appeared that statutory provisions and policy frameworks were being violated by the MAFs. It explained that the MAFs seemed to be complying with these only “in form and not in substance”, by registering partnership firms with Indian partners, even though the foreign companies remained the real beneficiaries of the business of chartered accountancy. Such partnership firms, it said, were “merely a face to defy the law”.

Another aspect highlighted by the court was that of investment in CA firms, in violation of prohibition of FDI policy, by using a circuitous route of interest free loans to partners.

Therefore, highlighting the need for a revisit of the existing framework, it stated,“Indian firms using similar brand names are registered with the ICAI but the real entities being MAFs, ICAI is unable to take requisite action for violation of Code of Ethics by the MAFs. Thus, revisit of existing legal framework may become necessary so as to have an oversight mechanism to regulate MAFs on the touchstone of Code of Ethics.”

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The court then suggested that the law be amended to create a separate regulatory regime for auditing services on the lines of the Sarbanse Oxley Act enacted in the US. It further clarified that remittances from outside India should be considered investment even when they are claimed to be interest fee loans to partners.

Investigation by various authorities

Having examined submissions of the parties as well as various authorities, the court held that a “a case is made out for examination” by the Enforcement Directorate, the ICAI as well as the central government, with regard to issues of violation of RBI/FDI policies and the CA Act by “secret arrangements”.

It then opined that the ICAI ought to constitute an expert panel to update its enquiry, observing,

“Being an expert body, it should examine the matter further to uphold the law and give a report to concerned authorities for appropriate action.

Though the Committee analyzed available facts and found that MAFs were involved in violating ethics and law, it took hyper technical view that non availability of complete information and the groups as such were not amenable to its disciplinary jurisdiction in absence of registration. A premier professionals body cannot limit its oversight functions on technicalities and is expected to play proactive role for upholding ethics and values of the profession by going into all connected and incidental issues.”

Thereafter, stating that accounting firms “could not be left to self regulate themselves”, it highlighted the need for an assessment by policy makers on the “extent to which globalization could be allowed in a particular field and conditions subject to which the same can be allowed.” Emphasising on the need for an overhaul, it observed,

“Absence of revisiting and restructuring oversight mechanism as discussed above may have adverse effect on the existing chartered accountancy profession as a whole on the one hand and unchecked auditing bodies can adversely affect the economy of the country on the other. Moreover, companies doing chartered accountancy business will not have personal or individual accountability which is required.

Persons who are the face may be insignificant and real owners or beneficiary of prohibited activity may go scot free. As already noted, the Reports of the Study Group and Expert Group show that enforcement mechanism is not adequate and effective. This aspect needs to be looked into by experts in the Government.”

Directions

The court then issued the following directions:

“(i) The Union of India may constitute a three member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs.

The Committee may also consider the need for an appropriate legislation on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in US or any other appropriate mechanism for oversight of profession of the auditors. Question whether on account of conflict of interest of auditors with consultants, the auditors’ profession may need an exclusive oversight body may be examined.

The Committee may examine the Study Group and the Expert Group Reports referred to above, apart from any other material. It may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA Regulations referred to above.

It may identify the remedial measures which may then be considered by appropriate authorities. The Committee may call for suggestions from all concerned. Such Committee may be constituted within two months. Report of the Committee may be submitted within three months thereafter. The UOI may take further action after due consideration of such report.

(ii) The ED may complete the pending investigation within three months; (iii) ICAI may further examine all the related issues at appropriate level as far as possible within three months and take such further steps as may be considered necessary.”

This article was originally published on LiveLaw.

Reports of PwC Being Asked to Probe Nirav Modi Scam Spark Concern

Questions over the audit firm’s spotty record in India have been raised in light of the move to have it investigate the Rs 11,000 crore PNB scandal.

Questions over the audit firm’s spotty record in India have been raised in light of the move to have it investigate the Rs 11,000 crore PNB scandal.

The logo of accounting firm PricewaterhouseCoopers (PwC). Credit: Reuters

New Delhi: Punjab National Bank, currently reeling from the Rs 11,000 crore Nirav Modi scam, has reportedly tapped audit and consultancy firm PwC to conduct a probe into the fraud.

A report in The Economic Times on Friday notes that the auditor will examine the workings of the alleged fraud and help the bank build a case against jewellers Modi and his uncle Mehul Choksi.

However, on Friday evening, the bank issued a statement denying the newspaper’s claims.

According to the report, PwC will specifically look at how the letter of undertaking (LoU) mechanism was misused by Modi and more significantly try and track the “end-use of the funds raised”.

Auditing record

The move to appoint PwC, however, has sparked concern due to the PwC’s controversial and spotty track-record in India.

In particular, although the firm has denied any wrongdoing, its role in the 2009 Satyam accounting scam.

It was only in January 2018 that the market regulator barred the network entities of Price Waterhouse from issuing auditing certificates for the next two years due to the “systemic problems”  that SEBI found in the auditing processes carried out by PW entities at the time of the Satyam scam.

In October 2017, the Citizens Whistleblowers Forum held a press conference that questioned the Centre’s decision to appoint PwC India to key government projects such as Digital India and ‘Make-in-India’ even after it had been “found fudging its own accounts and filing false audit reports on behalf of various companies involved in major scams, including Satyam, Global trust bank and liquor baron Vijay Mallya’s firms”.

According to the Economic Times report, it will be PwC’s job now to trace the assets that Nirav Modi owned and were disclosed on his company’s balance sheets so that “maximum recovery of dues” can happen.

E A S Sarma, former secretary to the Indian government, has also written a letter to the finance ministry and the Reserve Bank of India, questioning the move.

“Apparently, neither the Ministry of Finance nor RBI is concerned about the credibility of such an audit as there have been serious questions about the PwC being appointed as an auditor in view of its past track record,” Sarma notes in his letter.

“In the specific case of PNB, I would strongly recommend that both the Finance Ministry and RBI revisit the issue of appointing PwC as the agency to conduct a forensic audit of the bank. Whoever is appointed should be one with a clean record that ensures credibility.”

PwC in action

On Thursday, PwC’s role in the recent Religare Enterprises and Fortis controversy also came under the scanner with the Economic Times reporting that the company’s new auditors are unhappy in the manner that the auditors submitted an “unmodified report for a period when the central bank was examining some transactions within the group”.

“PW as auditors had a responsibility towards shareholders at large (and) should have given a clearer picture of the actual financial position, mainly (on) their subsidiaries and their fund diversion”, said Shriram S, managing director of InGovern, a proxy research firm, told the publication. media house.

Anti-Graft Forum Questions Centre’s Appointment of Firm Accused of Scams for Black Money Probes

PricewaterhouseCoopers, convicted in the Rs 7,000 crore Satyam scam, had also audited accounts of Vijay Mallya’s firm and the Global Trust Bank, which collapsed.

PricewaterhouseCoopers, convicted in the Rs 7,000 crore Satyam scam, had also audited accounts of Vijay Mallya’s firm and the Global Trust Bank, which collapsed.

PwC’s operation in India itself has been questioned by the group. Credit: PTI

PwC’s operation in India itself has been questioned by the group. Credit: PTI

New Delhi: The Narendra Modi government’s appointment of PricewaterhouseCoopers (PwC) India to key projects like black money probes, Digital India, Make in India and Smart Cities project has been questioned by the Citizens Whistleblowers Forum. The group has also expressed concern over the RBI’s engagement of the auditing firm to help conduct the audit of its information systems.

The firm has repeatedly been found fudging its own accounts and filing false audit reports on behalf of various companies involved in major scams, including Satyam, Global Trust Bank (GTB) and liquor baron Vijay Mallya’s firms.

PwC accused of various wrongdoings

Releasing a statement titled ‘Is PwC above the law’ at the first conference organised by the forum, Prashant Bhushan, a member of the forum, said it should be noted that the Modi government appointed PwC India as its consultant for black money probes through the income tax department. This was done despite the firm having been found guilty in scams, frauds, fudging of accounts, falsification of documents and even being convicted in the Rs 7,000 crore Satyam scam.

Recounting PwC’s tryst with the law enforcement agencies, Bhushan said the company has in the past been found guilty by the joint parliamentary committee (JPC) but action has been pending for the last 14 years. He said the Supreme Court had also directed the Securities and Exchange Board of India (SEBI) on January 10 to expedite its enquiry against PwC in the Satyam matter, which too has been languishing since 2010.

In Satyam scam, government did not contest suspension of seven-year term

The advocate-activist said the Serious Fraud Investigation Office, which comes under the Ministry of Corporate Affairs, had in 2009 and the Central Bureau of India had in 2015 found PwC partners guilty of knowingly signing fudged accounts of Satyam – the biggest scam in the history of corporate India. However, the forum noted that within a month, a sessions court had suspended their seven-year imprisonment sentence and there has been no progress in the case since.

On the involvement of the auditing firm with Mallya, the forum said “Rs 1225 crores [was] diverted from United Spirits Ltd. during October 2010 and July 2014”. But while PwC were the auditors till 2011, he said no action was taken against them by either SEBI or the Institute of Chartered Accountants of India (ICAI) even after two years of the matter coming into the public domain and despite ICAI being the regulator for the accounting and auditing profession in India.

‘PwC operation in India is questionable’

In fact, Bhushan said PwC’s operation in India is itself questionable since foreign CA firms are not permitted to practice in the country. “But the company says it has nothing to do with a foreign entity by the same name and claims to be independent. However, we have noticed that Rs 41 crores were transferred to PwC India office in Kolkata and was subsequently used by its partners to purchase an Indian chartered accountancy company. Similarly, Rs 500 crores was sent to India by its Dutch arm and the money was used to create a loan and it disappeared thereafter,” he said.

“Investigation by the Registrar of Companies and MCA had found that 15 directors, including four chairmen, were guilty of falsification of their own books of accounts and various other offences under the Companies Act over a four year period but the offence was compounded,” Bhushan added.

Modi regime wants a pliable auditor, consultant

On why the Modi government is continuing with the services of the company despite its murky past, Bhushan said “The governments want to give credibility to their accounts through such audit firms and which could be more pliable for them than one whose officials can be sent behind bars or fined thousands of crores”.

Bhushan also expressed concern over RBI allowing PwC access to its information systems for conducting the audit saying this would put all sensitive information of the RBI into their domain.

‘Government has no moral business to take advice from such firm’

Another member of the forum, Jagdeep Chhokar, who is also the founder and trustee of the Association for Democratic Reforms, commented that PwC was probably chosen for the task of finding black money because the company know how it is created. He insisted that considering the track record of the company, “the government has no moral business to take advice from them”.

In light of these findings, the forum has demanded immediate steps for implementing JPC recommendations, action in the GTB scam and finalisation of Satyam and other scam cases. It has also sought a probe into PwC’s own operations and accounts, registration of first information reports against its partners and directors accused of wrongdoing and termination of all government contracts awarded to it.

Two other members of the forum, Admiral (Retd.) L. Ramdas and former chief information commissioner Wajahat Habibullah also attended the press conference.

Why You Shouldn’t Be Bedazzled by Modi’s LED Claims

The government’s impressive claims of saving electricity by switching to LED bulbs are based on overly optimistic assumptions made in a 2015 report, not actual usage.

The government’s impressive claims of saving electricity by switching to LED bulbs are based on overly optimistic assumptions made in a 2015 report, not actual usage.

The not so bright truth behind LED usage in India. Credit: Cmiper/Flickr, CC BY-NC 2.0

Prime Minister Narendra Modi is proud of the government’s scheme to distribute millions of low-cost, energy efficient LED bulbs. And why not: Modi told the Lok Sabha on February 7 that the distribution of 21 crore LED bulbs had helped households save Rs 11,000 crore in electricity bills. Even the name bears his unmistakable imprint: ‘Unnat Jeevan by Affordable LED for All’, whose acronym is UJALA, Hindi for illumination.

UJALA by the numbers. Credit: Amitabh Dubey

Unfortunately, these numbers are mostly fiction.

First, a brief history. As with many other schemes that Modi has hogged the credit for, UJALA was designed and piloted by the UPA under the much less catchy name DELP (standing for – I kid you not – ‘Demand Side Management-based Efficient Lighting Programme’). DELP followed in the footsteps of the semi-successful Bachat Lamp Yojana that had resulted in the sale of 2.9 crore CFL bulbs at a price of Rs 15 each and, the government contends, boosted demand nationwide by driving market prices down. In 2013, the UPA decided to apply this strategy to pricier but even more energy-efficient LED bulbs; while the first scheme was subsidised by carbon credits, DELP would be paid for by power distribution utilities out of the savings generated by shifting from incandescent to LED bulbs.

A November 2013 pilot project in Puducherry led to the distribution of 6.5 lakh LED bulbs to 2.5 lakh households at a subsidised price of Rs 10 each. The government’s bulk order of six lakh LED bulbs caused the price to fall from Rs 800 per bulb in 2012 Rs 310, proof that the concept worked. As the chart below shows, successive orders caused bigger and bigger price drops, falling most recently (and controversially) to Rs 38.

Price trend of LED bulbs. Credit: Energy Efficiency Services Limited (EESL)/Amitabh Dubey

There’s no question that the Modi government has taken UJALA forward, scaling it up with sales of 23 crore LED bulbs (as on April 24). But if you think this was in any way a brainchild of Modi’s, or that power minister Piyush Goyal did much more than implement a roadmap already laid out for him, think again.

Still, how does it matter who came up with the idea, as long as it benefits the nation, right? The problem is that the claim of financial and energy savings is based on dodgy maths.

The government’s claims are based on a September 2015 PricewaterhouseCoopers (PwC) study that it sponsored, that looked at LED usage during pilot projects in Puducherry and in four Andhra Pradesh districts. The report stated that, once you factor in defective and unused bulbs, each LED bulb would produce an average saving of 134 kilowatt hours a year. Which translates into the savings Modi claimed in the Lok Sabha.

Multiply this by 77 crore LED bulbs, the planned total under UJALA, and you have a saving of 20,100 megawatts of peak load demand, equivalent to five ultra-mega power projects costing $15-20 billion (Rs 97,000-1,29,000 crore), for only Rs 3-4,000 crore. What’s not to like?

The issue is, the PwC study made overly strong assumptions to attain these savings. It assumed that all 77 crore 7-watt LED bulbs would replace 60-watt incandescent bulbs (which is fine) and, more problematically, that each would be used for an average of eight hours/day, 320 days in a year, equal to 2,560 hours/year. Now this is perfectly reasonable if you live in Leh, India’s northernmost district, and every day is the winter solstice when you get ten hours of proper daylight, and everyone sleeps only six hours; then you might conceivably leave all your LED lights on for eight hours. But, seriously?

Indeed, a 2008 World Bank study calculated that a light bulb will be used 913 hours/year. Even the state-owned Energy Efficiency Services Limited that actually runs UJALA assumes that a light bulb is used for 3.5 hours/day, 300 days/year, for a total of 1,050 hours. These more conservative figures translate into savings that are only 36-41% of what Modi claimed in the Lok Sabha.

More reason to take a dim view of the Modi government’s claims.

This piece originally appeared on Chunauti.