Chartered Frauds

Now this is odd title for blog meant for value investing but one article in ET on SEBI asking for a separate regulator to monitor Chartered Accountants provoked me to write this. Now this is not for bashing a particular profession but it is hard truth. Now every investor depends on information to assess his investments and financial information being one of keys to it. But what if information is prepared with all purposes but fair report of state of affairs. Below comments are from my experience with quality of information I have seen over years as a banker.

1. 95% of balance sheet we see in India are figment of imagination rather than accountant's independent view on state of entity.

2. 80% of CAs in India are in profession anything but accounting and most common professional service provided by CAs is bribe collection agents of Income Tax Department.

3. It is prevalent that banks do their own amendments to treat this information. Like unsecured loans are considered as equity!! Most NBFCs use multipliers ranging from 1.5 to 5 times to arrive at real income from reported business income to calculate loan eligibility. Some CAs even prepare different balance sheets from Income Tax and Banks.

4. Who pays for accounting? So go advice businessmen how to cheat on sales tax, excise and of course income tax. Advice how to fudge accounts to claim exemptions etc.

5. 80% of businessmen in India will be Rs.200 as bribe rather than pay Rs.100 as tax. It is built in their blood and culture. If you are paying taxes, you are considered an idiot in business community. 

6. Most businessmen will argue-Why pay income tax if all politicians are corrupt and anyway will waste our hard earned money if we pay tax. But it does not prevent him from paying bribe to politician for buying land, putting up plant and getting exemptions. It is all self interest.

How to correct this? It is all incentives which are at work and control regime of Nehru made it profitable to bribe than be honest. We need to change systems to get incentives right. For example prohibition is Gujrat probably makes liquor cheaper than anywhere else because there are no taxes. Instead of Govt. earning anything it is illegal distribution network involving police and politicians who get these bucks and it is all in name of Gandhi. Another example of Gandhian way of black money is exemption on VAT on fabric. Why? because it was symbol of freedom. How it works? No VAT means you can have as much fictitious entries in this trade without any cost. So most of balance sheets of traders of fabric include large number of money laundering activities. These are just few examples of wrong controls and exemptions.

Now coming back to topic, SEBI is very right to demand a regulator for CAs which should be different from ICAI. It is more of a gang to promote its own interests than regulate profession. A lots of black money and economy's problems will be solved if we have auditors doing their jobs rightly.  

Now why I should be writing this piece here. Reason is that though we have more listed companies than anywhere else in world but very few worthy of even considering for investment because you don't know what discount factor to apply to information for such manipulation. I drop further probe in 90% of companies due to these reasons. Even in I have invested I still have very major doubts on quality but there is no escaping this as of now.