When the facts change, I change my mind ... what do you do, sir? That quip of John Maynard Keynes, perhaps justifiable in the context then, is coming back to haunt investors in a big way. First, it was the credit rating firms—investors rushed in to invest in countries, even securities they deemed kosher; and then, just as the securities turned dud, sometimes even after, the firms were downgraded. New information, the credit rating agencies said. If that wasn’t bad enough, it appears auditors are now doing the same thing. In the case of the ongoing NSEL saga, after the auditors for NSEL retracted their audit, the auditors of NSEL’s parent chose to do the same with FTIL’s accounts since NSEL comprised a large proportion of FTIL’s profits.
While retracting of accounts is not illegal, auditors need to explain why investors need to trust them at all if. The reason why firms get respected auditors is that this convinces investors the firm’s accounts are kosher. In the case of Jignesh Shah’s FTIL, the auditors were not some fly-by-night operators, they were Deloitte Haskins and Sells. So, given that NSEL was such an important part of FTIL, surely it was incumbent on Deloitte to look at NSEL’s accounts carefully?
Sadly, this is not the first time auditors have been caught asleep. In the case of Satyam, it turned out the bank account statements were fake and the reason why the auditor slipped up was that the statements were provided by Satyam’s management—they were not obtained from the banks by the auditors. This is something the audit profession needs to address urgently since, if it doesn’t do this, someone else will come and address it for them.