How accountable are accounting firms?

With the US-based Securities & Exchange Commission suing accounting firm KPMG for allegedly letting Xerox Corp report false financial results, uncomfortable questions are being raised about the sanctity of market intermediaries.

SEC believes that KPMG was fully aware of Xerox inflating its revenues by a whopping $6 billion, and knowingly misled investors since the firm was anxious not to lose a premier audit client. KPMG has, of course, denied any wrongdoing and said it was a case of SEC and the accounting firm disagreeing over complex professional judgments.

One is not sure as to who will win this argument, but surely even KPMG realises that popular sentiment is against market intermediaries – especially after the infamous Enron scandal, where another accounting firm Arthur Andersen was found to be hand-in-glove with the Enron top brass in their financial racketeering.

And, why only accounting firms? US-based Datek Online, a pioneer in online stock trading, was involved in manipulating the Nasdaq's small-order execution system, which was set up to help small investors.

SEC discovered that the brokerage had also indulged in fraudulent bookkeeping during the market boom of the 1990's. Datek executives bought freedom by paying $70 million in fines – SEC called the payment as one of the largest securities fraud settlements ever.

Even well-respected names like Salomon Smith Barney, a brokerage unit belonging to the Citigroup, have been involved in misleading the small investor. Analyst Jack Grubman was caught puffing up stock ratings for WorldCom Inc, where investors lost millions of dollars.

The Indian financial market has been no stranger to these fraudsters. Remember the late Big Bull Harshad Mehta? Or the Bombay Bull Ketan Parekh? Millions of small investors lost their savings, thanks to the combined effort of this duo.

The Securities & Exchange Board of India has taken some action against vanishing companies – who floated public issues, pocketed the monies and simply disappeared – but what about the merchant bankers or the investment advisors who actually 'sold' the issue to the unsuspecting public. Or, what about the US-64 mess where UTI and the government connived to make unsuspecting investors believe that all's well with the Trust?

The Indian experience with accounting firms has been good so far, but who knows what the future has in store? Knowing the penchant of local market intermediaries to make a quick buck, it is foolish to imagine that Indian accountants are squeaky-clean. The whistle hasn't been blown yet, but the clock is surely ticking.