Pricewaterhouse & Cooper’s (PwC) audacious decision to challenge the Reserve Bank of India’s (RBI) action against it has won it a stunning interim reprieve from the Kolkata High Court. Following the collapse of Global Trust Bank (GTB), RBI had instructed various commercial banks and non-banking financial institutions not to engage PwC for their audit work. This affected PwC’s business and damaged its reputation.
In general, it is a great idea for regulators to punish auditors who are guilty of negligence or active collusion with dubious management to bleed companies. For instance, investors cheered when the US Securities and Exchange Commission (SEC) recently indicted Deloitte & Touche or when other accounting majors paid up over a hundreds of million dollars each to settle cases. In contrast, auditors of every Indian scam have got away scot-free.
Yet, PwC appears to be a scapegoat in this case, because it isn’t quite clear why it is being punished when it had in fact savagely qualified the GTB accounts for the period ended March 31, 2003. Especially because Ramesh Gelli and his cohorts who drove the bank to collapse, and the RBI officials who failed to initiate corrective action despite several warning signals, have remained virtually unscathed.
More importantly, why punish PwC without a detailed and transparent inquiry? PwC’s writ petition (WP 894 of 2005), which came up for hearing before Justice P. Chatterjee of the Calcutta High Court on April 29, made the case that its alleged negligence is being examined by the Institute of Chartered Accountants of India (ICAI), which is the appropriate body to investigate the charges.
The judge, after an initial hearing, ordered interim relief, which dealt a severe blow to the central bank by ‘‘restraining’’ it from ‘‘issuing any further instructions to any commercial bank and/or financial institution advising them not to engage the petitioner firm in the audit work until further orders’’. Justice Chatterjee said in his prima facie opinion that RBI ‘‘should not take any penal action against PwC until the issues raised were finally decided’’ after both sides filed their affidavits, within three weeks after the summer vacation.
In the Indian milieu, PwC’s decision to challenge RBI in court is an extremely bold move that would have been the result of serious internal debate and one that was decided only after other attempts to plead its case had failed. It is all the more gutsy because RBI is intolerant of even a whiff of questioning its authority or its decisions even when they smack of arbitrariness.
Given the sensitivity of the case, neither side cooperated in our effort to get their views. However, this column has followed the GTB case in some detail. We were the first to report the exit of three independent directors of GTB’s audit committee, which included a former chairman of Canara Bank and a former senior partner of Pricewaterhouse. Curiously, neither RBI nor the capital market regulator, which spends so much time writing up good governance codes, has probed why the directors quit GTB.
Soon after their resignation, GTB announced its results where PWC had even questioned its going concern basis since the networth was substantially eroded. PwC was soon shown the door and replaced by M. Bhaskara Rao & Co.
It is important to note that both the appointment and the removal of a bank’s statutory auditor require the approval of RBI and these are not benign decisions. In September 2002, RBI had embarrassed the bank by rejecting its request to reappoint Lovelock & Lewes as its auditor for the third time. The rejection was conveyed after the AGM notice had already been circulated. That year both shareholders and the Department of Company Affairs had raised questions about GTB’s accounts.
Even before that, RBI inspection report of 1999-2000 led to the exit of another audit firm — Mukand M. Chitale. RBI remains silent about the role of these firms, if any, in suppressing GTB’s continuous accumulation and suppression of bad loans, or its dubious links with Ketan Parekh and the companies whose shares he had ramped up. These actions had brought GTB to the brink and forced RBI to launch an emergency rescue operation. The central bank’s role is not limited to its silence about GTB’s functioning.
When GTB’s heavily qualified accounts became public, RBI issued an extremely unusual press release lauding the bank for cleaning up its books. Titled, ‘‘RBI welcomes cleaning up’’ of GTB financial results (for 2002-03), the release said, ‘‘the results indicate that the present management has made special efforts in recovery of non-performing assets relating to the previous years and has also made necessary provisions in accordance with RBI guidelines’’. Cleaning up the balance sheet was essential for the ‘‘good functioning of the bank’’ and the ‘‘good health of the financial system’’, said RBI.
Without getting into the merits of the legal battle between RBI and PwC, it is pertinent to ask what the central bank hoped to achieve by indicting PwC without an inquiry. A punitive action without inquiry or a reasoned order does no credit to any regulator. It is merely a terror tactic not a deterrent action to shake up the widespread dubious alliances between bankers, brokers, companies and their auditors.
It will be interesting to see how RBI proceeds against PwC. Even an ICAI inquiry will need RBI’s cooperation. At the very least, ICAI will need access to RBI findings or inspection reports that comment on PwC’s audit quality. If RBI pursues the Kolkata case to its logical conclusion, then all its regulatory actions in the GTB debacle could come in for judicial scrutiny and could set a precedent for future action.
Its efforts, or lack of them in punishing those responsible for destroying GTB and the shotgun alliance with Oriental Bank of Commerce (OBC) at the expense of OBC shareholders could also be examined. After all, OBC, which took on Rs 1200 crore of bad loans from GTB (as admitted by its chairman) was quickly allowed to raise Rs 1,500 crore from the public through a public issue and the pre-issue ramping of its share price has already turned controversial.
But, investor activist Kirit Somaiya has pointed out, retail investors subscribed to just 78 lakh shares as against their quota of 2.03 crore shares. Nothing could be a bigger indictment of the regulator’s handling of the GTB case. Ordinary investors are plainly disgusted. They distrust the regulators and their actions.