If only advertisements with selective answers to inconvenient charges could settle controversies. On Saturday morning, all business papers carried a full-page ad titled ‘Tata Group condemns campaign of vilification’. This unfortunately ended up confirming that the group prefers to answer selective queries.
The story behind the ad is simple. Sometime after the stockmarket collapsed following the irrational bull run of 2000, Tata Finance Limited was discovered to be deeply in the red and holding large chunks of deeply depreciated stocks. It also seemed to have gone out of its way to finance dealers of its sister company Telco, leading to further losses. That’s not all. Some transactions with a Telco subsidiary, Sheba Investments, smacked of circular trades aimed at boosting Telco’s bottomline.
This paper and others extensively reported all this. Those reports were based on extensive discussions with senior Tata executives. They raised questions about the quality of scrutiny by TFL’s statutory auditor S B Billimoria, and we understand from senior Tata directors that the firm has since resigned the account. The Tatas also sacked six employees including its former managing director Dilip Pendse and later Subodh Shah, and decided to support TFL with an unprecedented bailout of Rs 500 crore from other Tata companies.
They then commissioned a special audit by another highly reputed audit firm A F Ferguson whose senior partner Y M Kale recently completed its 904-page report. Parts of the report that were leaked to certain newspapers suggested that Mr Kale had gone beyond the role of the sacked employees and looked at the working of other directors in the group. The issue, however, turned extremely murky when the Tatas rejected Kale’s report and accused him of suppressing evidence against Dilip Pendse. This led to A F Ferguson sacking Mr Kale, with all partners expressing a lack of confidence in him and alluding to his past conduct without any explanation. They also returned the audit fee of Rs 95 lakh and set up another team to re-start the audit.
Given the international focus on accounting firms and their collusion with corporate clients, it was naive of the Tatas or A F Ferguson to believe that the developments would not attract intense media scrutiny, speculation and fresh investigations by the regulators. Or that the same firm could do a fresh audit without raising suspicion all round. Instead of answering the many questions raised by the sordid saga, the Tatas have chosen to hit out against the entire media with a paid ad that still avoids core issues. For instance:
1. The Tatas have rejected Y M Kale’s report, but are they rejecting every one of his findings on specific transactions and deals alongwith his alleged attempt to shield Pendse? The ad doesn’t say so. Also, although Kale’s report was not a statutory audit report, TFL owes it to its shareholders to disclose its contents.
2. A F Ferguson claims that the total professional fees earned from the Tatas are Rs 2.5 crore, but curiously enough, despite repeated questions, the Tatas have refused to confirm this figure. We asked if the sum total of money earned by A F Ferguson from the Tatas (including audit, consultancy, opinions on taxation, out of pocket expenses and other income) was merely Rs 2.5 crore. The group merely sent me a print-out from the capitalmarket.com website listing audit fees earned by A F Ferguson for five independent audits and three joint audits with S B Billimoria. The Tata ad carefully quotes Ferguson with regard to the fees. Why would such a simple matter not merit a clear answer?
3. As for the sacking of Kale, the Tata charges against him may all be true; but if they are, they raise questions about the entire accounting profession. Kale has been with A F Ferguson for over 30 years, is past president of the Institute of Chartered Accountants of India, on several Sebi and central government committees, and the RBI group for concurrent audit of banks. He was also chairman of ICAI’s Accounting Standards Board.
Since A F Ferguson’s decision to sack Kale is also based on his "past conduct", it calls into question all the audit reports signed by him and the role that he played on the ICAI and other important committees. At a time when the entire accounting profession is under such intense scrutiny, it is important that the Department of Company Affairs asks A F Ferguson to specify instances of Kale’s previous misconduct and take corrective action. His alleged mischief would also help the DCA in framing new rules for the accounting profession at a time when it plans to take over the ICAI’s powers of self-regulation. Again, we have no answers.
4. The Tatas allege that Kale withheld a statement made by their employee Mr Karyekar, and claim that Kale suppressed evidence against Pendse. But they only give us excerpts from Mr Karyekar’s letter to A F Ferguson. Is it because Karyekar also made some statements regarding TFL’s statutory auditor S B Billimoria? Surely, the Tatas are obliged to share the entire contents of Karyekar’s letter and not a part of it?
5. TFL’s letter to A F Ferguson (excerpts given to us) makes some serious allegations against Pendse regarding his personal transaction, conflict of interest in dealings with the suppliers of Windmills financed by TFL (Rs 306 crore) leading to huge losses, backdating transactions to fudge accounts and shady dealings with the notorious Global Telesystems group. Ironically, hardly anybody has supported Pendse’s actions or justified them. The press has merely pointed out that when TFL director, J E Talaulicar, is accused of insider trading or when loans to Telco dealers turn bad or certain transactions shore up Telco’s bottomline, they raise questions about the entire company and beg an independent scrutiny.
6. In this connection, it is strange that the RBI should state that it is only concerned with the safety of depositors’ money and is unconcerned with the seriousness of other issues.
7. Finally, the Tatas talk about conspiracy without realising that anyone in the media who had access to such a sensational report was bound to publish it. Ironically, the report was published by one of the Tatas’ favourite papers, which gets priority access to the group unlike many of us hacks who are viewed with great suspicion. At the end of the day, the ad still does not answer all questions about a case that suggests a serious breakdown in corporate governance at TFL. -- Sucheta Dalal