Print edition : August 15, 2003

The `white paper' the Chartered Accountants' Action Committee has brought out highlights the dubious ways of the multinational accounting firms operating in India but leaves untouched questions about the lack of ethics among Indian professionals.

GLOBALISATION'S malcontents are many and varied. Chartered accountants, under threat from the multinational accounting firms (MAFs) operating in India, are the latest to be bitten by the swadeshi bug.

The Chartered Accountants' Action Committee for Level Playing Field (CAAC), a body led by S. Gurumurthy, a professional auditor and the convener of the Swadeshi Jagran Manch, recently issued a `white paper' on MAFs, detailing their malpractices. Releasing the white paper in Chennai on July 13, Union Minister for Human Resource Development Murli Manohar Joshi observed that MAFs "are bound to be unethical as they are born out of sin". The Minister said that although the problems posed by globalisation were "not confined to the accounting profession", the MAFs were a crucial part of the globalisation phenomenon.

The white paper titled "Multinational Accounting Firms Operating in India" alleges that the MAFs have been involved in varied kinds of frauds even in the developed world; that they have either actively colluded with the offenders or have remained silent witnesses; and that many of them operate from tax havens, with little accountability in the countries they operate from. Although audit functions were the original strength of these firms, there has been a marked shift towards consultancy operations, which, in the last three decades, have grown into a multi-million-dollar business. The gathering pace of cross-border financial flows and the economic restructuring programmes - particularly in the area of economic deregulation and privatisation - paved the way for the boom in consultancy services.

The 141-page document lobbies for strengthening India's negotiating position on trade in accounting services under the auspices of the World Trade Organisation (WTO). It highlights the consequences of the "illegitimate" presence of MAFs in India, using the device of Indian "surrogates" through whom they conduct their business in India. The paper points out that the Indian accounting profession has not been alert enough to the damaging consequences of these MAFs.

While the crux of the report is a compilation of exposes - mostly gathered verbatim from sources in countries where MAFs have come under scrutiny for their misdeeds - the tone is unmistakably swadeshi. The recurring image is of the Indian chartered accountant as an emasculated, weak and powerless professional who has been wronged because he was shackled by the earlier "socialistic" system of controls. But for this, the Indian professional would have been able to reach for the skies. Although Indian chartered accountants are "the third largest army of trained and skilled professionals" in the world, they have been unable to play a global role, the report laments. To discerning observers, these elements - an ambivalent opposition to globalisation, while castigating anything that belonged to the earlier system of controls - bear the insignia of the Sangh Parivar's worldview.

TRADITIONALLY, auditing has been the primary function of chartered accountants all over the world. This requires them to attest that books of accounts of companies and other entities are in order, in accordance with the regulations. Indeed, most modern systems of governance make it mandatory for economic entities to get attestation done by qualified professionals. Most regimes have also established an apex body for the profession, to ensure not only the regulation of the profession but also the quality of personnel entering the profession. In India, the Institute of Chartered Accountants of India (ICAI) has played this role.

Two key aspects of regulations governing the profession, the positioning of barriers to entry and the mandatory qualification of accounts of corporate bodies, ensured that chartered accountants came to acquire an important role in the functioning of capitalism. In fact, this was perceived as the only way to ensure that all stakeholders - investors, regulators, owners of corporate bodies and the government - are satisfied that legal provisions have been followed. It is significant that both these key features of regulations governing the profession have come under strain in recent years, especially because economies are being deregulated.

The regulatory framework in most countries also required that only a national citizen did the attestation. This would appear to be perfectly rational, since otherwise regimes would find it impossible to ensure a rule-based capitalist system: after all, a national regime would find it impossible to bring footloose accountants to book within its territory. This was seen as the only means by which accountability could be ensured within national borders. Indeed, it would appear that Indian chartered accountants have nothing to complain on this score because no foreign chartered accountant or firm is allowed to do this function in India, which is exclusively reserved for Indian nationals. However, the CAAC articulates the widely shared belief that many of the leading MAFs - among them the Big Four of KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte Touche Tohmatsu - have entered into agreements with Indian "surrogates", enabling them to perform audits in India. The white paper points out that these MAFs, having obtained licences from the Reserve Bank of India to operate as consulting firms, have also entered the business of "attest and assurance services" by using the device of "surrogate arrangements". It points out that the "surrogate" route is adopted because the ICAI explicitly prohibits the hawking of such services by firms not licensed by it.

The large accounting firms in the West were the key players in the dramatic growth of the global consultancy business in the last few decades. Deregulation and the wave of mergers and acquisitions that occurred in the industry paved the way for the formation of these giant consulting firms. Many of these were firms engaged in audits of large corporations, but increasingly they also began to offer consultancy to their clients. Indeed, much of the corporate sleaze that has come to light in the last few years can be attributed to the conflict of interest inherent in the way these consultancies hawked their services to corporate clients - a fact that is best illustrated by the Enron debacle, which involved the dubious use of several thousand Enron subsidiaries, most of them in tax havens, to hide the company's losses. Arthur Anderson was Enron's auditor as well as consultant. As the consultant, it showed Enron how to use the device of off-balance sheet accounts of numerous subsidiaries; and, as the auditor, it certified that its books were perfectly in order (Frontline, March 3, 2002). In effect, there has been a growing fear that these companies are incapable of providing truly "independent" audits to corporate entities.

In a report released in 2002, Unison, a United Kingdom-based public service union, remarked that "the accountancy industry derives as much profit from management consultancy as it does from auditing". Consultancy covers every possible activity in modern businesses. These could be for the management of technologies and people in companies; or tax advice and corporate finance; or recruitment and deployment of personnel in companies; or corporate restructuring, especially mergers and acquisitions. In 1999, the Big Five (now Four, after the collapse of Arthur Anderson and its merger into Ernst & Young after the Enron collapse) in the United States had combined revenues of more than $15 billion, more than half of which came from non-audit lines of business.

The gathering pace of deregulation, particularly financial liberalisation and privatisation, has paved the way for these companies to offer their services on a global scale. The Unison report, which arose out of a study of these companies' role in the British privatisation exercise, observes that the Big Four "are both clients and client advocates in the privatisation industry". In other words, they advised the British government how to structure the privatisation of key government assets, and earned a fee from the government for having done this. And, in many cases, they continued as auditors to the private entity that bought the assets. Unison pointed out that "as fee earners they (the Big Five) benefit from the policy, and as auditors and consultants to the utility companies and private consortia buying into privatised sectors they benefit from their client's increased profitability." In India, several of these companies have been associated with deregulation exercises, among them was the disastrous deregulation of the power sector in Orissa. These mega consulting firms also operate in close alliance with investment banks, pension funds and other financial institutions, enabling them to prise open markets around the world. Although the white paper suggest that Indian companies are capable of entering this lucrative business, the fact that they are not coupled to finance capital indicates that this is likely to remain wishful thinking.

Meanwhile, in negotiations under the auspices of the WTO, the government appears to have denied entry to foreign accounting firms. Recent reports indicate that the Department of Company Affairs has proposed that India will not allow accounting firms to set up base in the country. Soon after the release of the white paper the government came under pressure from the European Union, which sought clarifications from the government about the entry of accounting firms into India. Earlier, in June, the National Association of State Boards of Accountancy, the regulatory body for the profession in the U.S., informed the ICAI that it would suspend market access to Indian professionals if market access was denied to American professionals in India.

The white paper's assertion that the Indian government's sudden withdrawal of protection from foreign consultancies has prevented the Indian professional from benefiting from the "opportunities which liberalisation and globalisation have thrown up". If only the government had not done this, Indian firms would have "consolidated and networked", to "match the scale of the MAFs", the paper claims.

To more nuanced observers of globalisation, this would appear to be not only a pipe dream, but one that seeks to mislead Indian professionals on what is in store for them from foreign competition. Speaking on July 13, Gurumurthy urged Indian accountants to "participate in the process of control of virtual finance" in order to defend the "national interest". This invocation of the national interest and honour, while seeking to protect tangible professional turf, would appear rather odd to unbiased observers who have no stake in the profession but who may well be moved to work for a national cause. While an expose of the misdeeds of the MAFs would certainly be in order, the pretence that everything is fine among Indian accountants gives the feeling that something far less than the national interest is at stake. After all, the profession was jolted by the Tata Finance affair, in which a leading auditor (no less than a former president of the ICAI) was removed from a leading Indian auditing firm because he failed to give a tailor-made report to the corporate giant (Frontline, August 31, 2002).

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