At the start of this year, I outlined my intention to devote more discussions toward positive and uplifting topics.
Furthermore, as a former member accountant, the integrity and reputation of the accounting profession is a matter which I feel strongly about.
For both of these reasons, I take absolutely no pleasure whatsoever in writing about yet another financial scandal, particularly one which involved a blatant breach of ethical duties from the world’s largest accounting firm.
Auditors receiving excess fees for looking the other way
The sorry scandal, which has been dubbed ‘India’s Enron’, involved Indian outsourcing services company, Satyam Computer Services, and their auditor, PricewaterhouseCoopers (PWC), the largest accounting firm in the world.
In short, a charge sheet filed in court last week by the Central Beareau of Investigation, the top investigation agency in India, alleges that:
(1) the accounts of Satyam were falsified over a period of several years, with both sales and profits being overstated as a result of the creation of forged sales invoices; and
(2) PWC certified the accounts of Satyam as being true and correct (in spite of the inflated sales figures), in return for which the firm recieved an exorbitant level of fees, which were well in excess of the standard rete for audit services.
(In total, the charge sheet alleges that 7,561 false invoices were generated. The result was an overstatement of sales figures by an average of eighteen per cent each quarter from the period spanning April 2004 until the fraud was discovered in January this year (refer article).
The scandal came to light in January, following an acknowledgement by company chairman Ramalinga Raju that company accounts had been falsified)
Just what the audit profession didn’t need
This is exactly what the audit profession did not need.
Still reeling from Enron and other accounting scandals earlier this decade, it was always going to take years for the profession to regain the trust and respect of the global investment community, let alone that of the general public.
In this regard, the profession is not doing particularly well right now. The Madoff scandal was damaging enough, but having the largest accounting firm in the world mixed up in a scandal like this is simply devastating.
(From an audit point of view, The Madoff affair involved a significant lack of professionalism on the part of the firm responsible for the audit of the fund. That firm employed only one qualified accountant and should never have accepted responsibility for a project well beyond its capacity to handle properly)
A few bad apples spoil it for the rest
From a personal perspective, I must say that when I previously worked in the accounting profession, the auditors with whom I dealt conducted themselves in a diligent and responsible manner at all times, and their manner reflected a very high level of professional integrity.
I am confident that the same could be said for the vast majority of those employed within the audit profession.
But an industry or profession is judged by the behavior of its leading firms. In this regard, the conduct of the ‘big four,’ accounting firms is particularly crucial, and any scandal which rocks one of these firms reflects badly upon the entire profession.
This is especially the case with PWC, the largest of the big four.
In years to come, I certainly hope that the audit profession is able to regain the trust and respect not only of the global investment community but also the broader general public as well. The same can be said with regards to the broader accounting profession.
The honest and diligent majority who work within the profession deserve nothing less.
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