In December, US audit regulator Public Companies Accounting Oversight Board (PCAOB) imposed sanctions on seven entities belonging to the KPMG global network for violations of professional auditing standards, quality control standards and other rules.
Among them was KPMG India and its partner Sagar Pravin Lakhani, who settled the matter for USD1 million (INR8.2 crore today) and USD75,000 (INR61 lakh), respectively.
PCAOB found that during the course of that audit, Lakhani and other members of the KPMG India engagement team signed off on dozens of blank work papers.
The blank work papers were replaced with completed work papers, in many cases after the issuance of the audit report, but the sign off dates were not updated. “As a result of this practice, the work papers did not appropriately reflect the dates on which the audit work was actually completed and reviewed. KPMG India was aware that its audit software allowed personnel to modify or update audit documentation without modifying the sign off date,” PCAOB said in its release.
Regulatory experts say PCAOB penalises such shortcomings without the need for any proof of any actual misstatement in the accounts, much less without any need of evidence of any loss suffered by anybody. PCAOB did not name the Indian banking company, whose books were audited and signed off by Lakhani in July 2017. According to the regulator’s website, Lakhani had audited two Indian banks namely ICICI Bank and HDFC Bank that year. ET Prime could not ascertain which of these the violations pertained to.
While KPMG and its partner settled with the US regulator and agreed to make improvements to the processes and IT systems, their behavior with the Indian regulator has been far from cordial.
In August 2020, NFRA published an Audit Quality Review Report (AQRR) of BSR and Co's audit of IL&FS Financial Services. BSR and Co is a KPMG network firm.
An entire section of the AQRR dealt with "Integrity of the Audit File and Audit Firm's IT Controls Review".
NFRA concluded that the IT tool used by the auditor for audit documentation does not comply with certain fundamental security requirements of logs monitoring, authentication, and access control protocols. “The platform does not fully meet the audit (inspection) requirements as well. The audit firm has compromised authenticity and reliability of the electronic audit documentation. The deficiencies are systemic and structural in nature and arise from compromise of basic principles of IT security, requirements of SQC-1, SA 220 and SA 230. This renders the audit documentation unreliable.”
The regulator said there was no certainty that the “audit documentation was completed in a time frame contemporaneous with the actual audit procedures performed, and without performing any further audit procedures or changes other than administrative changes, after the audit report date”.
In not rectifying these deficiencies, the audit firm is guilty of serious professional misconduct, the AQRR on the IL&FS Financial Services audit by BSR & Co said.
NFRA's review of the IT systems seems far more detailed than PCAOB seems to have done. NFRA’s report shows the extent of detail that the NFRA has gone into, and the numerous opportunities offered to BSR to provide their explanations.
"KPMG/BSR clearly know who they can take liberties with, and who not, and, clearly, how. In "Silver Blaze", Sherlock Holmes draws attention to the curious incident of the dog in the night. The abuse of the justice system to generate (useful, to the wrongdoer) delay is commonplace. But what is the signal when a watchdog (seemingly) acquiesces in this delay?"
— R Sridharan, former chairperson, NFRA
The report presents evidence of each one of these explanations being gone into with an open, objective mind, and NFRA's conclusions on each point have been explained on the basis of undeniable evidence.
However, BSR’s response did not show any attempt to address these deficiencies. Many of them are far more serious than what is covered by the PCAOB's order. Not only that, NFRA has proved serious misstatements that have occurred as a result in the published accounts. The loss to the public interest has been colossal with the IL&FS collapse threatening to derail the entire financial system. Government and regulators had to take various measures to bring stability to the system.
“Going by the scale of the penalties levied by the PCAOB for the violations that they have sanctioned, NFRA's AQRR should have had catastrophic consequences,” says former NFRA chairperson R Sridharan.
NFRA issued SCNs (show cause notices) to both – the firm, and the relevant Partners — in January 2021. Promptly, stay orders were obtained from the Delhi High Court.
Read More at https://economictimes.indiatimes.com/prime/corporate-governance/pay-up-abroad-but-play-around-in-india-are-global-firms-taking-indian-regulators-for-a-ride/primearticleshow/98316505.cms