Reference no: EM132945650

In India, the business press labeled an accounting and financial reporting scandal involving Tata Finance Limited as that country's "Enron." (In fact, there were allegations that the accounting firm hired to investigate the scandal, A.F. Ferguson, had "shredded" some relevant documents.) Tata Finance is one of many public and private companies that make up the massive business conglomerate known as the Tata Group.

• The scandal involved Tata Finance and a subsidiary of Tata Finance, Niskalp, that had incurred losses associated with technology stocks. The scandal was that Tata and its subsidiary had engaged in fraudulent transactions to "cover-up" these losses.
• In 2001, Tata Group's senior management retained one of India's most respected accounting firms, A.F. Ferguson & Co. (AFF), to investigate the Tata Finance fraud (although AFF was not Tata Finance's audit firm did audit several of the largest Tata companies). That fraud had greatly embarrassed the Tata Group, including its chief executive, Ratan Tata. Throughout its history, the Tata organization had been known for its uncompromising ethics and commitment to public service. In fact, J.N. Tata had insisted that two-thirds of the organization's profits be contributed to charitable causes, a policy that the Tata Group follows to this day.
• Ratan Tata and the other senior executives of the Tata Group believed that the person responsible for the Tata Finance fraud was that company's former "managing director" or chief operating officer, Dilip Pendse, who had been associated with the Tata Group for 25 years. However, Dilip insisted that he had kept Tata Group executives, including Ratan Tata, fully informed of Tata Finance's financial affairs. Ratan Tata and his colleagues hoped that the AFF investigation would not only establish that the former managing director was responsible for the fraud but that the investigation would also "clear their names."
• The Tata Group executives were shocked when the 904-page AFF report on the Tata Finance scandal linked them to the fraud. Eventually, AFF withdrew the report and fired the three individuals responsible for writing it, including one of its senior partners, Y.M. Kale, who was among the most prominent members of India's accounting profession (a senior executive of the Tata Group reportedly requested that Y.M. Kale supervise the investigation of the Tata Finance accounting fraud). AFF's retraction of its report (and return of the fees paid for that report) on the Tata Finance fraud and the subsequent firing of Y.M. Kale created a storm of controversy focusing on the Tata Group and AFF. India's business press charged that Kale was being made a scapegoat and that Tata Group senior management had forced AFF to retract its report and fire Kale. Although AFF was not the statutory auditor of Tata Finance, the scandal threatened to undercut the credibility of the nation's independent audit function since it suggested that accounting firms routinely kowtowed to their major clients.

Issues

Problem a. What standards are to be used if a US practitioner, rather than AFF, would have been engaged to investigate Tata?

In the OAO Gazprom case, we considered that culture plays a role in practicing accounting and auditing in a foreign country. United States accounting professionals and the firms with which they're associated are expected to adhere to the professional standards of the AICPA, state licensing boards, PCAOB, and the SEC.

If a US firm would have performed the services that resulted in the AFF report, the investigation would be considered a "forensic engagement." As a result, the AICPA's Statement on Standards for Forensic Services No. 1 would be relevant to that engagement. This standard applies to any member of the AICPA (or employee of a member firm) who provides services to a client as part of a litigation or investigation engagement. This standard reinforces the importance of the four general standards of the profession that are presented in the AICPA Code of Professional Conduct.

Problem b. Should reputation or perceived level of ethics plays a role in determining the trustworthiness of a company being examined?