The Infosys mentor-in-Chief, Mr N.R. Narayana Murthy, articulated the anger of many-right thinking people well-versed in the nuances of accounting when he said that only ‘cash is real; profit is opinion'. This is known even to accounting professionals, particularly auditors. Investors, too, have been feeling queasy about accounts, but are philosophically resigned to setting store by them.
In the Indian context, there have been a large number of instances of auditors using the most delightfully vague auditing gobbledygook: ‘subject to the following qualifications…the accounts give a true and fair picture'. And the ‘qualifications' could be of such grave consequence as to morph profit into loss and assets into liabilities, but the auditors would lose no sleep over them.
Window-dressing has been the oldest trick in an accountant's bag and he continues to use it with telling effect, with the auditors playing ball. Auditors would have been true to their salt had they called a spade a spade, instead of shielding the company and themselves by cloaking their comments in woolly legalese. Small wonder, accountants and rating agencies have suffered the maximum loss of credibility in the last few years following the American financial debacle, with the two combining to mislead the investors, when their role was to inform and advise them.
VALUATION AND AUDITING
The auditor's remit is not to value, though he is often cast in that role through ignorance, or in the mistaken belief that a balance sheet is a statement of values. A valuation statement from an accredited auditor is looked upon with awe by investors. And the same statement emanating from an auditor of foreign pedigree is taken as the holy writ.
Jagathi Publications, whose promoter is Jagan Mohan Reddy of YSR Congress, was valued at Rs 196 crore by a Chennai-based auditing firm Jagadeesan and Co, despite an accumulated loss of Rs 319 crore staring in one's face.
Not happy with this valuation, Jagathi Publications sought the services of the formidable Ivy League accounting firm Deloitte Touche Tohmatsu India (P) Ltd, which first put a value of Rs 2,500 crore on the business, based on its self-generated business plans for the next five years, and later on inflated it further to a staggering Rs 3,500 crore. All these have come out during investigations widely reported in the media. Such a valuation pulled out of thin air, as it were, was not to massage the ego of the promoter; it was reportedly used for persuading sundry industrialists and influence-seekers into investing in the publication at a premium of Rs 350 for a Rs 10 share when they approached the government headed by the late YSR allegedly for assorted favours, such as allotment of a plot in an SEZ area.
Profit forecast is by no means easy. That accounting firms blithely put their imprimatur on such forecasts for hefty fees, merely relying on management assessments that are bound to be coloured, is a sad commentary on accounting oversight in the country.
EVADING ICAI
To be sure, the Institute of Chartered Accountants of India (ICAI) has been striving to go for the jugular of foreign accounting firms operating in India, either directly or through Indian proxies, but in vain.
Almost all the Ivy League accounting firms get through the regulatory noose by floating management consultancy outfits, with the same brand name for good measure, that do not come within the ICAI's oversight. And these are the ones that strut the corporate corridors proffering their valuations after so-called due diligence, which is euphemism for doing the management's bidding for a hefty fee.
This has become almost de rigueur both when a company is still closely held as well as when it goes public.
What else explains the abandon with which premiums are fixed through the book-building process, especially for companies whose products are yet to enter the market, and even more shockingly for companies still stuck in the drawing board? PriceWaterhouseCoopers, the auditing firm in the dock over Satyam Computers, could be proceeded against by the ICAI because it was doing auditing work, amenable to ICAI regulation.
That the shares are shallow becomes obvious when they are listed and exchanged for cash. Indeed cash is real; profits, ratings and valuations are opinions, opinions procured at hefty fees in a spirit of mutual back-scratching. That equity investment is subject to market risks is trite. What is not trite is it is also subject to manipulative risks, more so when the equity share in question is not yet listed. It is not as if quotations of listed securities cannot be manipulated.
Large-scale circular trading is rampant, especially in the case of fly-by-night companies, to hoodwink investors into believing that there is a genuine demand for the company's shares and the price in the market is also genuine, whereas the truth is that a charmed circle drawn from the promoter group enacts an elaborate charade of buying and selling.