The recent controversy over the engagement of Pricewaterhouse Coopers (PwC) as a consultant for an IT project in Kerala has brought into sharp focus the role of the internationally renowned “Big Four” in the world of audit, advisory and consultancy services. The other three are EY (Ernst and Young), KPMG and Deloitte. All four are headquartered in London.
In the same bracket, we can also add McKinsey and company and BCG (Boston Consulting Group) that are engaged in pure “advisory” services. Both are based in the United States.
Governments in India, State and Central included and many corporates have been utilising the services of these companies. The engagement of PwC by the current Kerala government for the IT department’s work is not a one-off affair.
The Vizhinjam port project feasibility report, for instance, was compiled by EY in 2015. In neighbouring Karnataka, the government has entered into an agreement with one of the Big Four for inviting investments into the State. Many banks, and even the Union Government, have been engaging such services for quite a few years now.
These firms have almost the same structure. There is a legal entity based in either the UK or the US and in different countries these agencies operate as registered local entities. In that sense, they are just networks under a common brand name with no liability for the head-quartered entities.
They have professionals with engineering/management backgrounds who generally have impeccable academic credentials. They also may have domain knowledge. But often, they understand the subject matter from the government/department/corporate directly, compile an analytical report and present it back to the entity. Mostly they may have more style than substance. Their fees are benchmarked to international standards and are really “huge” by our yardsticks.
The PwC issue has come in the wake of allegations and findings that all these six entities have been caught in scandals which are embarrassing in the extreme. One should also remember that the Big Four was Big Five, just about a decade ago.
Arthur Anderson, one of the Big Five, shut shop in the wake of the collapse of US energy giant, Enron around 2005-06. Enron had become infamous in India for its role in the Dabhol power project in Maharashtra. Arthur Anderson was found lax in the audit of Enron.
The existing Big Four themselves are caught in unsavoury episodes of allegations/wrong-doing.Consider the following:
• PwC was the auditors to Satyam Computers Ltd which committed one of the largest corporate frauds in Indian history. They were banned from conducting audit. But they have been surviving by providing “other” services like audit advisory, tax consultancy and other services. In September, 2019 PwC was fined Rs 230 crores for violations under the FEMA rules.
• KPMG LLP agreed to pay a $50 million fine over allegations former staffers used stolen information to alter some of the accounting firm’s previous audit work and cheated on training exams, the U.S. Securities and Exchange Commission said in 2019.
• Deloitte was fined $10 million by New York's banking regulator in 2019 over its consulting work for Standard Chartered on money laundering issues.
• The Wirecard accounting scandal in Germany has raised fresh questions about corporate governance, with some experts calling it the “Enron of Germany.” EY was the auditor for the company.
• The New York Times newspaper had reported that a global network of consultants, lawyers, bankers and accountants helped Dos Santos, belonging to the ruling family amass a fortune and park it abroad. Some of the world’s leading professional service firms — including the Boston Consulting Group, McKinsey & Co. and PwC — are implicated in this.
The Standard Operating Procedure (SOP) in all these instances is for the entities to pay fines and move on. If their track record is so controversial why do governments engage them ?
In my view, there is a compact among the Western financial intermediaries to sustain this network. Many projects funded by the World Bank Group, the IMF and other multilateral institutions often insist that the project should be audited/monitored by the Big Four.
If emerging economies need international approval or funding for their various initiatives, these Big Six have the wherewithal to get the attention we want. It is almost similar to using an old boys’ network. This is often the reality.
What can India do ? The India of 2020 is not that of 1990. We have the strength now as the world’s fourth largest economy and the Atma Nirbhar to look them in the eye and tell them off wherever they are not required. Instead of they dictating terms to them, we should be able to utilise them strictly on our “utilitarian” terms.
India has the expertise and the skill sets to do the work undertaken by these Big Six without them. As a mature nation, we need to be also pragmatic. We can use them when required. They are not untouchables.
If the current Kerala controversy can make the followers of an ideology claiming to stand for the poor, a formation which is a legatee of Mahatma Gandhi and the major political party in the country that draws inspiration from Deendayal Upadhyaya, deal with these agencies in the true spirit of Atma Nirbhar, we would have drawn the right lessons from the PwC flop show in Kerala.
(The author is top bank executive. Views are personal).