KPMG India in a Million Dollar Settlement with a US Regulator and Not Even a Ripple in India
KPMG India settled a proceeding before the US Public Company Accounting Oversight Board (PCAOB) on 6 December 2022; but there is barely any coverage by the Indian media. PCAOB, which audits public companies, censured KPMG Assurance and Consulting Services LLP (KPMG India) and the engagement partner (EP) Sagar P Lakhani for quality control failures, supervisory failures and documentation failures while working with a public company in 2017. It led to a monetary penalty of US$1mn (million) on KPMG India and US$75,000 on Mr Lakhani, who is also suspended from associating with a registered public accounting firm for one year and requires the audit firm to “undertake and certify the completion of certain improvements to its system of quality control” systems.
 
This is the second such sanction in connection with an Indian listed entity. The last time was when the infamous Satyam Computers imploded. In May 2011, PCOAB settled an investigation imposing a penalty of US$1.5mn in addition to US$6mn imposed by the Securities Exchange Commission (SEC) of the US on five firms of PricewaterhouseCoopers International (PWC) in India. The five PWC entities who participated in the settlement were: Price Waterhouse and Price Waterhouse & Co in Bengaluru, Lovelock & Lewes, Price Waterhouse and Price Waterhouse & Co, Kolkata.
 
At that time, PCAOB’s order correctly said, “The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports.” That is why it is surprising that the latest order against KPMG has made no ripples, and there isn’t a peep out of India’s market regulator or audit regulators – the rather tame self-regulatory body Institute of Chartered Accountants of India (ICAI) or the more aggressive national financial reporting authority (NFRA).
 
India’s investor population had doubled in the past three years and, while our regulators have indeed been more active in recent years in response to huge corporate blowouts, one expects some public indication of a follow-up on the KPMG India matter. There are several good reasons for this. First, since it is a settlement, the order does not identify the listed company in which these lapses occurred in 2017. All it says is that the ‘issuer’ is into wholesale and retail banking and treasury services, headquartered in Mumbai.
 
Among other things, Mr Lakhani and his colleagues were found signing off on blank work papers that were later “replaced with completed work papers, in many cases after the issuance of the audit report, but the sign off dates were not updated.” Shockingly, completed versions of the work papers were replaced in 2017 after KPMG India had released its audit report and before the documentation completion date.
 
The detailed order documents how eAudIT, a proprietary software of KPMG, was misused—the organisation was aware of it but did not stop the misuse. Did the sign-off on blank documents only happen with ‘Issuer A’, the bank referred to in the PCAOB order? Was Mr Lakhani the only engagement partner who did this, or was he just unfortunate to be caught? ICAI, NFRA and the Securities & Exchange Board of India (SEBI) ought to investigate how extensive was the practice and what impact it had on the final audit reports. I emailed KPMG India’s communications department for comments on the PCAOB order. This article will be updated if they respond. The PCAOB order does say that KPMG India has ‘disciplined certain of its personnel’ and has ‘established and implemented’ changes to its quality control policies and procedures.
 
Who Is Issuer A?
PCAOB’s order does not even go into the impact of these lapses, if any, on the accounts of the unnamed bank, whose identity should matter to Indian investors and regulators. Since KPMG India and Mr Lakhani are, together, coughing up US$1,075,000, one assumes that the lapses are serious enough to warrant further investigation and Indian investors have the right to demand more information.
 
The spotlight in this case would be on a Mumbai-based private bank with US listing. I reached out to some senior people with KPMG links, but they have chosen to remain silent. This is no surprise either; the auditing profession has got away with very relaxed oversight over the decades by ICAI. When NFRA chose to be a lot tougher, the profession, barring exceptions, closed ranks to try and defang the new regulator through the ministry of corporate affairs (MCA), as I wrote in September 2021 (Read: When Policy-makers and Judiciary Fail To Understand Basics of Regulation and Accountability).
 
So brazen was the industry’s attitude that, in January 2020, when NFRA issued its first set of show-cause notices to auditors of IL&FS Financial Services (IFIN), the two chartered accountants (CAs) rushed to the Delhi High Court with a writ petition, instead of responding to the new regulator. Senior CAs wrote columns to say how the profession and captains of industry were upset at NFRA’s action since the firm was superior to most others in the field. Media articles suggested that only individual partners ought to be held responsible and the audit firm let off because debarring a firm causes a lot of disruption. 
 
This view is ironic, as compromise and collusion is usually institutionalised because the rewards and incentives of partners are tied to the business generated by them. While partners guilty of professional misconduct who permit the fudging of accounts must, indeed, be penalised, sparing the firm will allow large audit firms to make scapegoats out of partners who get caught. 
 
Fortunately, NFRA wasn’t intimidated by the noise created by the accounting industry. Between 22 and 28 July 2020, NFRA issued three detailed orders against the engagement partners for IFIN. CA Rukshan Daruvala was debarred for five years and slapped a Rs5 lakh penalty; CA Shrenik Baid was also debarred for five years but was penalised Rs15 lakh, while CA Udayan Sen was penalised Rs25 lakh and debarred for seven years.
 
The findings in all cases were similar—professional misconduct, collusive behaviour in going along with management in agreeing to misstatements/omissions leading to fraud on the users of the financial statements. NFRA also indicted SRBC & Co, of the Ernst & Young (EY) group for deficiencies in auditing Infrastructure Leasing & Financial Services (IL&FS) for FY17-18 (Read: IL&FS: NFRA Pulls EY Firm SRBC & Co for Several Deficiencies in FY18 Audit).
 
All this is, indeed, heartening, but it is too little. There are only three other orders since then on the NFRA website, all in 2022. On 21 June 2022, CA Gulshan Jagdish Jham was debarred for a year and slapped with a penalty of Rs1 lakh for professional misconduct, failure to report material misstatements, and exercise due diligence in the audit of Prabhu Steel Industries Ltd. On 12 September 2022, CA Som Prakash Aggarwal (of S Prakash Aggarwal & Co) was debarred for three years and slapped with a penalty of Rs3 lakh as EP of Vikas WSP Ltd. He was also asked to undertake training on accounting and audit standards and submit proof thereof within 180 days. On 19 September 2022, CA Rajiv Bengali (of Subramaniam Bengali & Associates) was barred for five years and a penalty of Rs5 lakh. As EP for Trilogic Digital Media, he was charged with false reporting in the independent auditor's report, failure to comply with auditing standards, etc.
 
Given the number of forensic audits ordered by SEBI and the falsification of accounts or diversion of funds brought out during the bankruptcy resolution process of corporate defaulters, regulatory action seems too little and too slow.
 
V Ranganathan, former director and partner at Ernst & Young LLP, says, “The distressing information that public banks have written off more than Rs10 trillion in the last five years and the average recovery has been pathetic is a reflection of the poor auditing both at the banks’ and at the borrowers’ end. It is time the government takes this issue seriously and strengthens the system to monitor the audit firms and create an unambiguous legal framework for swift and fair trials.”
 
Some favour the US-style settlement process adopted by PCAOB and KPMG India to our slow and tortuous process. But we have seen how the settlement provision has been vitiated by arbitrary settlement amounts at SEBI. Often, the penalties are trivial, and there is little information on the wrongdoing or its impact that could help or warn investors. Also, there seems to be no shame in ‘settling’ wrongdoing, which defeats its very purpose. Sources tell me a whole bunch of ‘consultants’ have set up shop, offering to negotiate quick and low settlements with the regulator.
 
Even in the KPMG India case, the PCAOB order is less than satisfactory since it does not name the bank involved. If PCAOB’s claimed objective is to “protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports”,  the settlement order tells us nothing about whether or not the bank’s audit was compromised and to what extent. How does that protect investors?
 
Compromised, collusive or even negligent auditors are a serious worry for any lender or investment professional. Apart from a few good orders from NFRA, some in the audit industry, especially after the IL&FS debacle, have tried to separate audit and non-audit business. Others are sticking to the claim that there is no conflict of interest. In my view, it is too early to introduce a ‘settlement’ system in India. It would be far better to strengthen NFRA and give it more teeth and manpower to effect a serious clean-up first.

Comments
radhikaasb
1 year ago
Is finding name of bank that difficult? Some reverse working on which banks it audited during last 3 years will.do the trick.
chraheemca
1 year ago
Very disturbing and distressing news. When the banks are writing of trillions of rupees as bad loans from defaulted but wealthy businessmen, the auditors being watch dogs should be double careful, especially when it comes to an international firm like KPMG. If the auditors are lenient and sign off financials so carelessly what is the assurance and the confident the public will get. Need tougher actions rather than these monetary fines and the name of the bank involved should be disclosed, if there is a collusion between the management and the auditors
ca.vivek.in
1 year ago
BAd Day for CA Profession

https://www.linkedin.com/posts/activity-7012861252456624128-2U7-?utm_source=post_nba&utm_medium=member_desktop&utm_campaign=copy
kcganga2108
1 year ago
Is there not a way to force NFRA take cognizance of such glaring professional proven misconducts by Indian CAs /Firms through say mass emails for a start? For too long the CA community have been shielding rogue elements amongst them despite PM Modi appealing to them on number of occasions.
ca.vivek.in
Replied to kcganga2108 comment 1 year ago
NFRA will do the justice...
swapneeld07
1 year ago
HDFC bank !!
Alert Citizen
Replied to swapneeld07 comment 1 year ago
Deloitte is/has been a statutory auditor of HDFC bank and not KPMG.
I think if one reads the article carefully and does 5-10 min research , he/she can find which bank author is talking about.
Kamal Garg
Replied to swapneeld07 comment 1 year ago
To my knowledge, it is ofcourse, not.
saharaaj
1 year ago
Indian settlements are in Indian ways when settlers get chairs on initial installment dish out of 8/10 crores the settltement is of different kind
ca.g.ganesh
1 year ago
By signing blank undated working papers a bad example has been setup by the top leading firm. This will show the professionals in bad light
Alert Citizen
Replied to ca.g.ganesh comment 1 year ago
Respected sir, this profession has already been in a bad light for the last 15 yrs and making new lows every year. Only question is how much low these guys want to go...
Be it a Satyam, Yes Bank, DHFL, PMC bank, PNB bank, demonetization or GST fake bills issue....these professionals have given 'stellar performance' when it comes to behaving in negligent and unethical manner and they were rest assured that their professional body will not take any action against them. Hence, when NFRA was introduced these professionals went from pillar to post to stall the implementation of NFRA
Kamal Garg
1 year ago
Absolutely horrible and questionable professional misconduct. Offenders must be brought to book and a heavy penalty including debar from further professional engagement should be effected.
By the way, there is no private Indian bank which is listed in US as written in the article for the referred entity.
sucheta
Replied to Kamal Garg comment 1 year ago
Yes there is and we know which it is. But let the regulators do their job Just naming it doesnt help anyone right now
ca.vivek.in
Replied to sucheta comment 1 year ago
ICICI

Alert Citizen
Replied to sucheta comment 1 year ago
Is KPMG still doing audit of that bank ?
Kamal Garg
Replied to sucheta comment 1 year ago
ADR listing is not full equity listing.
Alert Citizen
Replied to Kamal Garg comment 1 year ago
ADR is the only route for Indian cos to get listed in US equity markets. Full equity listing is only for companies incorporated in US.
Kamal Garg
Replied to Alert Citizen comment 1 year ago
Correct. And that's why the author has to come convincing on her statement in the article.
Kamal Garg
Replied to Kamal Garg comment 1 year ago
And banking regulations in India does not allow a banking company incorporated in US or any other country.
Alert Citizen
Replied to Kamal Garg comment 1 year ago
Sir, most of the moneylife readers are well educated and financial literate. So they know that US listing means ADR listing. Try to understand the bigger issue (of negligent/unethical auditors) which moneylife is trying to raise...
sucheta
Replied to Kamal Garg comment 1 year ago
It is unclear what you are imputing here and why you are doing it. This is an order from a regulator. Instead of holding Indian regulators accountable you are going on about "author has to come convincing...". Sir, this is trolling and unlike social media, we will need to activate moderation. You are a regular reader and commentator, please do not use the facility for needless speculation and wrong information!
Alert Citizen
Replied to sucheta comment 1 year ago
Lol...it seems he is a CA who felt offended by this article....hence, he is finding some silly mistakes in a write up...Just ignore him.
BTW i like the image used by moneylife for this article "KPMG JOSH"...very creative !!!
Kamal Garg
Replied to sucheta comment 1 year ago
Absolutely no offence intended or any other thing and my sincere apology to you for my comments.
yerramr
1 year ago
Even financial dailies that make headlines of the billionnaires, are totally silent! Audits and regulations are taken better care of by the small firms than big corporates involving frauds of unrecoverable dimensions!!
duvvuridp
1 year ago
Indian audit is about protecting the firm from regulation! Hence, the auditor is fully hand in glove with the firm, its paymaster. Expecting anything better is naivette! Of course, regulatory oversight is a big joke across sectors!
peruvemba.ramachandran
1 year ago
All these Professional 'Trade-Associations" , like the ICAI, Bar Association, The Cost & Works Accountants Assocation, the Bank Officers Association, or IBA, are all pressure group, like our Supreme-God-playing chup-reme Court; which makes everyone 'chup' with their political power; that's why they spend crores to contest for those posts also.
plays6710
1 year ago
The fraud of such Partners needs to be exposed. Such partners should be blacklisted for life. One of such Partner is Srinivas in risk consulting. Real fraud protected by few senior members. No competency simply cheating the Clients.
Bringing revenue for firm is not only criteria to keep partners. This fellow will bring more risk to the firm. Immediate action should be taken by regulators and enforcement agencies in India.
Alert Citizen
1 year ago
In USA, after one Enron scam 'Arthur Andeson (Auditor)' was liquidated. In India, even after scams like Yes Bank, PNB, PMC bank, no major action taken against auditors. Our govt and regulators still have faith in auditors capability and conscience. After every fraud, some senior CA member comes forward and says "Auditor is watchdog and not a bloodhound"...."FIn statement is responsibility of Mgmt and not that of Auditor" . worst part is , the Govt of INdia and regulators happily accept this.

The fact is ICAI has become more powerful than govt of India. It seems they have very strong lobby in delhi, which stalls any regulatory devpt which affects the interest of CA fraternity. This is very dangerous and pushing our nation to bigger financial troubles.
Now the question is what can be done ?
The solution is quite simple....CA's have audacity to take on the govt, regulators because they are given lot of monopoly powers :: 1)Stat audit can be done only by ICAI member (FCA, ACA) 2) tax audit under income Tax act can only be done by ICAI member (FCA, ACA). Now if you want to put these CA's in check, you need to take away these monoply powers.
1) Instead of 1 accounting body (ICAI) which looks after stat audit for entire country , we should have 3 or 4 accounting bodies. For eg. Australia has 3 accounting bodies
2) Monopoly of CA's in income tax audit should be taken away. even CMA's and CS should be allowed to conduct income tax audit.
These measures will not only put CA's in check but due to competition it will also reduces fees clients have to pay for tax audit/ stat audit. Most importantly save our country from major troubles
vram2311
1 year ago
All Government RFPs are written by BIG 4 , they are too much ingrained into our system . Unfortunately Indian auditing firms lack credentials
peruvemba.ramachandran
Replied to vram2311 comment 1 year ago
All our audit firms are Rs.1000 a CA certificate -ones; like the Rs.200 Notaries and Ambulance-chasing lawyers outside our City courts. ???????????????????? ???????????????????? ????????? ?????????????????? ???????? ????????? ????????????????????????? ?????????????????????????? ???????????????????? ????????????? ????????????????????. ???????????????? ???????? ????????????????? ????????????????????????????????????. ?????????????? ???????????? ???? ?????????????, ????????????? ?????? ????????????????????? ???????????????????? ???????????????? ???????????? ???? ?????????????-???????????????????????????????? ?????????????????; ???????????? ????????? ???????????????? ?????????????????????? ???????????? ??????????????????????????-????????????????????? ?????????????????????? ???????????? ????????????????; ???????????? ??????????????????-?????????????? ???????????????????????????????????? ????????????????????????? ???????? ?????????????????, ???????????? ???????????? ?????????????????????????-?????????????????? ????????? ????????????? ????????? ?????????????????????? ????? '????????????????????????'; ???????? ?????????????????????????? ?????????? ???????????????? ???????????????? ???????? ??????????????????????, ???????? ???????????? ????????? ?????????????????????????-?????????????????? ????????? ???????????????????????????????????????????????? ??????????????????.
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