Governance Watch - Issue 25

by Dina Medland in London

Audit, Advice, Governance – And Giant Squids

A warning bell rang out last week with media headlines around audit, consultancy, legal services and governance. The Securities and Exchange Board of India (Sebi), the country’s securities regulator, banned global accountancy firm PwC from auditing listed companies in the country for two years after failing to spot a $1.7bn fraud at Satyam Computer Services. “The order comes nine years after the scam at Satyam Computer Services came to light and after two failed attempts by PwC to settle the case through the consent mechanism” wrote Live Mint. 

Sebi’s report, which ran to 108 pages, said that PwC had neglected to check “glaring anomalies” in the financial details reported by Satyam. Coverage in the Financial Times said: “For about five years beginning in 2003, Sebi wrote, Satyam inflated its revenue by accounting for 7,561 fake invoices. The fraud persisted in part because PwC, Satyam’s auditor, “did not independently check the veracity of the monthly bank statements.” 

Also in the FT, we read that Coca-Cola’s South Africa arm had decided to stop working with the consultancy Mckinsey after it “became embroiled in a vast political scandal in the country” involving the Gupta family. So, the story added, has Sasol, the Johannesburg-listed energy company. 

The FT quoted Iraj Abedian, chief executive of Pan-African Research, as saying: “It makes perfect sense for Coca-Cola and all other major corporates to cut ties with McKinsey.” It went on to say he added that, with the launch of a new inquiry, public pressure would mount against all those who keep doing business with companies linked to the corruption scandal.

In the same week, in one of the most read stories on the Financial Times site, was the news that Deloitte is expanding its legal services offering in the UK, following similar moves by its big four competitors. Deloitte’s plans “will increase its access to a global market that ALM Intelligence, a consulting and legal analyst, valued at $600bn in 2016, compared with $450bn for accounting and $271bn for consultancy” said the FT story. 

As it points out, the big firms have the means to invest in automation technology and artificial intelligence to meet client demand for faster and cheaper legal services. 

But, where is all this leading in terms of better corporate governance? It is far from clear that even audit services are under enough scrutiny. The Indian regulator’s decision against PwC has taken nine years to come down, and may be the harshest yet. In its ruling, Sebi said it took a “stern view of market abuse and fraudulent practices, particularly when persons tasked with protecting the interest of investors are themselves hand-in-glove with the main perpetrators of the fraud”.

I believe that’s also called ‘conflict of interest’, and frankly, it’s everywhere, but sometimes well hidden. From the point of view of Governance Watch, it’s a very real concern as the professional services firms look to turn themselves into ‘giant squids’ offering a variety of service options. If you recall, the squid was given the unfortunate attributes of a vampire in the context of Goldman Sachs a decade ago.

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