Monetary fines good idea for those who fail to do their duty

By: |
December 5, 2019 4:27 AM

Monetary fines are a good idea for those who fail to do their duty, but a blanket ban also serves a useful function.

It is, of course, true that the directors of firms also need to be punished—in the case of IL&FS, even as its debt rose from Rs 49,000 crore to Rs 91,000 crore in four years, its risk management committee hardly met or flagged the issue.

As a general rule, monetary fines are preferable to outright bans; to that extent, a committee under corporate affairs secretary Injeti Srinivas is right to recommend monetary fines on auditors. The bans, the committee feels, should only be done if it is proved the audit firm was obstructing justice. But, if this is implemented in the current context of the 2-year ban on PwC for its role in the Satyam scam, and the 5-year ban the government wanted on audit firms Deloitte and BSR (part of KPMG) for their role in the IL&FS scam, it results in incomplete justice; the Bombay High Court has given interim relief in the IL&FS case.

Audit firms are the first independent check on boards and the management of companies; rating agencies, banks, and investors rely on their judgment; when they are compromised, the entire financial system is put at risk. IL&FS’s debts are around Rs 100,000 crore, more than half of which is owed to PSU banks. When a Satyam or an IL&FS was trying to impress investors with its corporate governance and clean accounts, it used the PWC/Deloitte/KPMG tag—indeed, the smaller audit firms who actually do the audits derive their heft from being part of the PWC/Deloitte/KPMG network—so, if the prestigious network is let off with just a monetary fine, it will have no obligation to ensure that partner firms do their job properly. In the IL&FS case, there were 141 subsidiaries, 12 associates, and 26 JVs whose accounts were audited by other audit firms; since the main auditor knew the consolidated group debt was Rs 100,000 crore, surely it needed to flag this, and the fact that servicing this was near impossible?

It is, of course, true that the directors of firms also need to be punished—in the case of IL&FS, even as its debt rose from Rs 49,000 crore to Rs 91,000 crore in four years, its risk management committee hardly met or flagged the issue. But, not punishing directors doesn’t mean letting off auditors is okay.

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