KPMG India in a Million Dollar Settlement with a US Regulator and Not Even a Ripple in India

KPMG India settled a proceeding before the US Public Company Accounting Oversight Board (PCAOB) on 6 December 2022; but there is barely any coverage by the Indian media. PCAOB, which audits public companies, censured KPMG Assurance and Consulting Services LLP (KPMG India) and the engagement partner (EP) Sagar P Lakhani for quality control failures, supervisory failures and documentation failures while working with a public company in 2017. It led to a monetary penalty of US$1mn (million) on KPMG India and US$75,000 on Mr Lakhani, who is also suspended from associating with a registered public accounting firm for one year and requires the audit firm to “undertake and certify the completion of certain improvements to its system of quality control” systems.

This is the second such sanction in connection with an Indian listed entity. The last time was when the infamous Satyam Computers imploded. In May 2011, PCOAB settled an investigation imposing a penalty of US$1.5mn in addition to US$6mn imposed by the Securities Exchange Commission (SEC) of the US on five firms of PricewaterhouseCoopers International (PWC) in India. The five PWC entities who participated in the settlement were: Price Waterhouse and Price Waterhouse & Co in Bengaluru, Lovelock & Lewes, Price Waterhouse and Price Waterhouse & Co, Kolkata.

At that time, PCAOB’s order correctly said, “The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports.” That is why it is surprising that the latest order against KPMG has made no ripples, and there isn’t a peep out of India’s market regulator or audit regulators – the rather tame self-regulatory body Institute of Chartered Accountants of India (ICAI) or the more aggressive national financial reporting authority (NFRA).

India’s investor population had doubled in the past three years and, while our regulators have indeed been more active in recent years in response to huge corporate blowouts, one expects some public indication of a follow-up on the KPMG India matter. There are several good reasons for this. First, since it is a settlement, the order does not identify the listed company in which these lapses occurred in 2017. All it says is that the ‘issuer’ is into wholesale and retail banking and treasury services, headquartered in Mumbai.

Among other things, Mr Lakhani and his colleagues were found signing off on blank work papers that were later “replaced with completed work papers, in many cases after the issuance of the audit report, but the sign off dates were not updated.” Shockingly, completed versions of the work papers were replaced in 2017 after KPMG India had released its audit report and before the documentation completion date.

The detailed order documents how eAudIT, a proprietary software of KPMG, was misused—the organisation was aware of it but did not stop the misuse. Did the sign-off on blank documents only happen with ‘Issuer A’, the bank referred to in the PCAOB order? Was Mr Lakhani the only engagement partner who did this, or was he just unfortunate to be caught? ICAI, NFRA and the Securities & Exchange Board of India (SEBI) ought to investigate how extensive was the practice and what impact it had on the final audit reports. I emailed KPMG India’s communications department for comments on the PCAOB order. This article will be updated if they respond. The PCAOB order does say that KPMG India has ‘disciplined certain of its personnel’ and has ‘established and implemented’ changes to its quality control policies and procedures.

Who Is Issuer A?
PCAOB’s order does not even go into the impact of these lapses, if any, on the accounts of the unnamed bank, whose identity should matter to Indian investors and regulators. Since KPMG India and Mr Lakhani are, together, coughing up US$1,075,000, one assumes that the lapses are serious enough to warrant further investigation and Indian investors have the right to demand more information.

The spotlight in this case would be on a Mumbai-based private bank with US listing. I reached out to some senior people with KPMG links, but they have chosen to remain silent. This is no surprise either; the auditing profession has got away with very relaxed oversight over the decades by ICAI. When NFRA chose to be a lot tougher, the profession, barring exceptions, closed ranks to try and defang the new regulator through the ministry of corporate affairs (MCA).