BOMBAY, 19 August — This seems to be the season of scams. And like a can of worms, more and more filth seems to be creeping out, laying bare the urgent need to rehaul the system. And this time, the "scam season" was ushered in by US with its infamous Enron scandal and after that came, Xerox, then WorldCom. It is quite unbelievable that a mammoth consulting organization like Arthur Andersen could actually be involved in accounting scams. Anyway, that too was a precious lesson — nothing is bigger than the lure for money, not even Arthur Andersen! And in all this, the biggest casualty has been the integrity of accounting. How can we all now trust anyone?

And this wave of scams has also hit the Indian shores. Not that India lacked any scams but it is just that the time was opportune. This time, the stink has been raised by none other than the Tata’s. Well, Tata’s are one of the most respected and trustworthy industrial houses of India and hence it comes as a rude shock to all of us to know that a Tata company has also scammed!

The company in the news is Tata Finance and over the past few days it has been in the eye of a very bad storm. The air is rife with news that there is a major scam brewing in Tata Finance but many seem to be in the dark about the exact nature of this scam. So lets take a look at what exactly is happening in this company.

It all began one year ago. Tata Finance had appointed A. F. Ferguson in May 2001 to prepare a detailed report on its operations between April 2000 and March 2001 after financial irregularities to the tune of Rs.5.00 billion were detected.

If one may recollect, it was this irregularity which landed former Tata Finance Managing Director Dilip Pendse and five others in trouble. The Tata’s had filed a criminal complaint against the above mentioned people, accusing them of siphoning off funds from Tata Finance for "personal benefit". It also said Pendse had fled the country on July 22, 2001, and asked the police to revoke his passport and bring him back to the country.

The Tata’s had stated that Pendse had kept the Tata Finance board in the dark about the precarious conditions of its subsidiary Niskalp Investment & Trading and kept on pumping Tata Finance money into Niskalp beyond his authority, thereby cheating the RBI and SEBI. And the Tatas had subsequent to the financial scam increased their stake in Niskalp to 50 percent for a consideration of Rs.400 million.

Now the news on this front is that the economic offenses wing (EOW) of the Bombay police has given a clean chit to Pendse and the others. It is believed that the department had not been able to find evidence to corroborate the allegations of criminal misconduct.

And now the reason for the company being in the controversy? The auditing agency, Ferguson submitted its final report in April this year. The report found evidence of deals by Tata companies to artificially inflate profits, the sort of practice for which Enron is being prosecuted in the US. The report also found that Tata companies had circumvented limits on inter-corporate deposits by disguising loans as ready-forward transactions — another Enron trick. The Tatas contested many of these findings strongly.

On July 23, 2002, Tata Finance wrote to Ferguson, disagreeing with several comments made by the latter. On Aug. 2, 2002, Ferguson wrote to Tata Finance withdrawing the report. It also decided to appoint a new team to prepare a fresh report. Soon after the report was withdrawn, Y. M. Kale, the author of the report, resigned from A. F. Ferguson.

This was followed up by the Department of Company Affairs (DCA) asking the registrar of companies to take action against Tata Finance. It has been felt that the Tata group pressurized A. F. Ferguson to backtrack on the report. The DCA has asked for annual audited accounts of the company for the last five years besides a copy of the Ferguson report and internal audit reports.

This unprecedented withdrawal has raised the hackles of the entire accounting community, with allegations that the management of Tata Finance, including Tata Industries Managing Director Kishore Chaukar were informed about all deals. The issue is — how can an accounting firm "withdraw" its observations just because the company was not happy with it? It is the duty of any auditing firm to point out the discrepancies, isn’t that the basic objective of any auditing firm?

What this issue highlights is that maybe auditing firms do indeed work for the companies for whom they audit. Independent views and observations are good in theory but not in practical life. Then this does nullify the entire purpose of any auditing agency, doesn’t it ? And worst of all, public confidence in the Tatas and A. F. Ferguson has been dented.