|11 June, 2019

India hurts itself with clumsy Big Four blitz

Deloitte and KPMG's BSR & Associates were the main firms to sign off on the books of IL&FS Financial Services, a major division among some 350 reviewed by dozens of auditors

People walk past a building of IL&FS (Infrastructure Leasing and Financial Services Ltd.) outside its headquarters in Mumbai, India, September 25, 2018.

People walk past a building of IL&FS (Infrastructure Leasing and Financial Services Ltd.) outside its headquarters in Mumbai, India, September 25, 2018.

Reuters/Francis Mascarenhas

MUMBAI, (Reuters Breakingviews) - India is hurting itself with clumsy oversight of the Big Four. New Delhi on Monday sought a five-year audit ban on Deloitte Haskins & Sells and KPMG’s local affiliate for alleged failings at IL&FS Group, an infrastructure lending group seized by the government last year after it was crushed by some $14 billion of debt. The process will rattle local and multinational companies.

Deloitte and KPMG's BSR & Associates were the main firms to sign off on the books of IL&FS Financial Services, a major division among some 350 reviewed by dozens of auditors. India claims the duo colluded with management and that “evergreening” – when a borrower masks delinquency by using new loans – was brushed aside. The firms say they performed audits as required by law and will defend their positions.

Regardless of the case’s merits, which are fuzzy, the way it is being handled does not reflect the good governance India has been pushing. Parts of the Serious Fraud Investigation Office’s charges circulated on WhatsApp for days before they were officially filed. Even after the proposal for a lengthy ban was made in court on Monday, Deloitte had yet to receive a copy of the formal accusations.

There are other whiffs of politics at play, too. For example, India mandated a few years ago that companies rotate accountants, a sensible step, but one also designed to spread work among more local firms. Deloitte’s dominant share, as measured by the market capitalisation of clients, slipped in the ensuing years, but the Big Four’s did not.

Although PwC and EY were recently issued bans in separate cases, the big IL&FS accountants also make for useful scapegoats. The company was nearly 40 percent owned by government-backed entities, including the Life Insurance Corporation of India and State Bank of India, the country’s biggest investor and lender, respectively.

If the harsh penalties hold up, it will leave companies relying on smaller, local auditors. It’s not clear they will be up to the task expected by boards and shareholders, underscoring the problem of the industry’s over-consolidation. But even if Deloitte and KPMG suffer a lesser penalty, India’s slapdash handling of the affair will have done damage.

CONTEXT NEWS

- India’s corporate affairs ministry on June 10 filed court papers seeking a five-year auditing ban on Deloitte Haskins & Sells and BSR & Associates, KPMG’s local arm, for alleged failings at Infrastructure Leasing and Financial Services Group.

- The pair were the main auditors of IL&FS Financial Services, one of some 350 subsidiaries of the privately-held lender. India in October took control of IL&FS, after it started to default on portions of its debt burden of 994 billion rupees, around $14 billion.

- Lawyers representing the audit firms and some of their executives told the court that they had not been served with a charge sheet filed by the ministry’s Serious Fraud Investigation Office, according to the Economic Times.

- Government lawyers admitted that they had only served an electronic version to BSR and were yet to send the documents to Deloitte, the newspaper added. The next hearing date is set for June 21.

(Editing by Bob Cervi and Jeffrey Goldfarb)

© Reuters News 2019

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