Tata
Finance
Limited
Case Analysis
Carbon, Famila
Samson, Christine May
Table of Contents
CASE BRIEF .................................................................................................................................................... 3
Case Abstract ............................................................................................................................................ 3
Auditor’s Dilemma .................................................................................................................................... 3
Auditor’s Question .................................................................................................................................... 3
Research Question .................................................................................................................................... 3
CASE CONTEXT .............................................................................................................................................. 4
Tata Group ................................................................................................................................................ 4
Tata Code of Conduct ............................................................................................................................... 6
Ownership and Corporate Structure ...................................................................................................... 13
Nature of the Entity ................................................................................................................................ 14
Operations .......................................................................................................................................... 14
Investing .............................................................................................................................................. 14
Financing ............................................................................................................................................. 15
Market................................................................................................................................................. 15
Industry ................................................................................................................................................... 15
Regulatory Body- Financial Regulatory Bodies in India ...................................................................... 17
RESEARCH QUESTIONS................................................................................................................................ 20
Question 1. .............................................................................................................................................. 20
Question 2. .............................................................................................................................................. 21
Question 3. .............................................................................................................................................. 22
Question 4. .............................................................................................................................................. 24
Question 5. .............................................................................................................................................. 26
CASE BRIEF
Case Abstract
The accounting scandal at Tata Finance involved a little-known subsidiary of the company,
Niskalp Investment & Trading Company. The subsidiary, after incurring huge losses from its large
investment in technology stocks, uses intercorporate deposits to maintain its minimum capital adequacy
ratio. Moreover, the company opts to desubsidiarise Niskalp to protect its balance sheet by not having
to disclose the losses of its subsidiary anymore. This measure failed to remedy the company’s financial
problem. After the condition was revealed to the public, Tata group dismissed Dilip Pendse, the senior
operating officer for making the unauthorized investments. Pendse claimed that Tata group executives
were aware of the fraudulent transactions but the latter disagreed to his statement.
To clear their
names, Tata retained AFF to investigate the scandal. The audit report confirmed Pense’s allegation and
criticized the quality of the company’s corporate governance. Upon public disclosure, AFF retracted the
report and dismissed Kale. This has caused AFF’s reputation in distress.
Auditor’s Dilemma
The A. F. Ferguson & Company’s dilemma is whether to withdraw of their audit report after it
was publicly known. The report which was expected to clear the names of Tata Group’s executives
turned out to support Dilip Pendse’s allegation that they were aware of the deceitful transactions. AFF’s
independence was threatened by Tata Group because the firm audits several of the largest Tata
companies and this close affiliation enhanced AFF’s stature and prestige within the country’s accounting
profession. As an independent auditor, AFF has a responsibility to the public. In order to maintain public
trust and confidence in the accounting profession, AFF must adhere to standards of ethical conduct that
embody and demonstrate integrity, objectivity, and concern for the public.
Auditor’s Question
How can the auditor decide on withdrawing the audit report?
Research Question
1.
What are the criteria to be considered by the auditor to establish quality audit report?
2.
What are the standards involved in withdrawing an audit report?
3.
What are the threats posed by the engagement to the auditor?
4.
How should the auditor deal with these threats?
5.
What recommendations can be made to reinforce the independent audit function?
CASE CONTEXT
Tata Group
In the 10th century a group of Iranians fled Iran as refugees in search of somewhere to practise
their religion freely. The Iranshah Atash Behram at Udwada - the most scared fire temple in India, which
houses the flame that brought by the Parsis on their flight from Iran. They finally ended up on the shores
of Gujarat and were granted leave to stay there, thus founding the Indian Parsi community (Parsi being
Gujarati for Persian). Over the next centuries, Zoroastrianism survived with just a few minor cultural
differences creeping in India. The Zoroastrian response to the increasing urbanisation and cultural
diversity of the 20th century was one of flexibility and integrity that reflected the three core values of
good thoughts, good words and good deeds. The respect for Zoroastrianism grew through its generous
and healthy contributions to the societies it encountered, and its reputation for the honesty of its
businessmen.
Although there was a decline of the priesthood and the global dispersion of the sparse
population of remaining Zoroastrians has become a serious issue for the survival of the Zoroastrian faith.
However, the same readiness to defy adversity and insistence on remaining true to the values of
Zoroastrianism prevails. These are the same qualities which have ensured its survival for the last 3000
years. The Parsis were among the most ardent supporters of India’s long struggle to become
independent of Great Britain. India’s largest privately owned company is controlled by a Parsi family, as
is the Tata Group, India’s largest conglomerate. It has helped shape the economic and political history of
India over the past century.
Tata Group is one of India's largest and most respected business groups. Its name is synonymous
with India's industrialization by seeding India’s pioneering business sectors. A visionary entrepreneur, an
avowed nationalist and a committed philanthropist Jamsetji Nusserwanji Tata (J.N. Tata) laid the
foundations of Tata Group when he started a private trading firm in 1868. The three great ideas of his
life: setting up an iron and steel company, generating hydroelectric power and creating an institution
that would tutor Indians in the sciences. None of these ideas would come to fruition while Jamsetji Tata
lived, but they were realised in full measure by those who followed him.
In 1874, Jamsetji Nusserwanji Tata set up the Central India Spinning Weaving and Manufacturing
Company Limited and thus marked the Group's entry into textiles. In 1887, he formed a partnership
firm, Tata & Sons, with his elder son Sir Dorabji Tata and his cousin Ratanji Dadabhoy Tata. His younger
son Sir Ratan Tata joined the firm in 1896. In 1902, the Indian Hotels Company was incorporated to set
up the Taj Mahal Palace and Tower, India's first luxury hotel, which opened in 1903. This was the most
dazzling of the Tata enterprises that came into being during Jamsetji Nusserwanji Tata’s lifetime. Legend
has it that Jamsetji Nusserwanji Tata set his mind on building it after being denied entry into one of the
city's fancy hotels for being an Indian. Today, the Taj Group of Hotels is a byword for luxury and quality,
with standout properties across the world.
In 1904, Jamsetji Nusserwanji Tata died in Germany, the chairmanship of the Tata Group passed
to the elder of his two sons, Sir Dorab Tata, who accomplished the daunting task of turning his father’s
extraordinary ideas into reality. Sir Dorab was the force behind the setting up, in 1905, of the Tata Iron
and Steel Company. Seven years later, India's first iron and steel plant, in Jamshedpur in the eastern part
of the country, had started its production. In 1910, the Tata Group broke new ground once again, this
time by generating hydroelectric power from a site near Bombay. In 1911, seven years after his death,
Jamsetji Tata’s long-cherished dream of establishing an institution where Indians could cultivate their
scientific temper was realised. The Indian Institute of Science, set up in Bangalore, would nurture some
of the brightest minds in India. In 1912, Tata Steel introduced eight-hour working days well before it
became statutory in much of the West, and the first Tata provident fund scheme was started in 1920
(governmental regulation on this came into force in 1952). The Tata townships, and the facilities they
have, are an example of the manner in which the Tata Group extends itself to care for its employees.
In 1917, Tata Oil Mills Company was established to make soaps, detergents and cooking oils. In
1932, Tata Aviation Service, the forerunner to Tata Airlines and Air India, India’s national carrier, took to
the skies. The maiden flight in the history of Indian aviation took off from Drigh Road in Karachi, now in
Pakistan, with JRD Tata at the controls of a Puss Moth. In 1953, the Indian government nationalised Air
India. Its Trusts have instituted the Tata Institute of Social Sciences in 1936; India's first cancer hospital,
the Tata Memorial in 1941, and in 1945, the Tata Institute of Fundamental Research, which became the
cradle of India's Atomic energy program. In 1939, Tata Chemicals, presently, the largest producer of
soda ash in India, was established. In 1945, Tata Engineering and Locomotive Company (renamed Tata
Motors in 2003) was established to manufacture locomotive and engineering products. In 1954, India's
major marketing, engineering and manufacturing organisation, Voltas, was established. In 1962, Tata
Finlay (now Tata Tea), one of the largest tea producers, was established. In 1968, Tata Consultancy
Services (TCS), India's first software services company, was established as a division of Tata Sons. In
1970, Tata McGraw-Hill Publishing Company was created to publish educational and technical books. In
1984, Titan Industries, a joint venture between the Tata Group and the Tamil Nadu Industrial
Development Corporation (TIDCO), was set up to manufacture watches.
In 1996, Tata Teleservices (TTSL) was established to lead the Group's foray into the telecom
sector. In 1998, Tata Indica, India's first indigenously designed and manufactured car, was launched by
Tata Motors. In 2000, Tata Tea acquired the Tetley Group, UK. This was the first major acquisition of an
international brand by an Indian business group. In 2001, Tata entered into insurance business in joint
venture with Tata AIG. In 2007, Tata Steel acquired Corus the fifth largest steel company in the world.
The Tata Group presently employs about 350,000 people. Taking good care of this large family is
a priority for the Group, and it has a tradition to stay true to while doing so. The Zoroastrian beliefs can
best be summed up by the maxim: Humata, Hukhta, Hvarshta. The creed translates in English to “Good
Thoughts, Good Words, Good Deeds”. Zoroastrians try to live their daily lives by this creed. Zoroastrians
work towards improving the local community and society in general. They tend to give generously to
charities and are often behind educational and social initiatives. The Parsi community in India is
particularly known for its industrious contributions to Indian society. Because of this, Tata companies
have always believed in returning wealth to the society they serve. Two-thirds of the equity of Tata
Sons, the Tata promoter company, is held by philanthropic trusts that have created national institutions
for science and technology, medical research, social studies and the performing arts. The trusts also
provide aid and assistance to non-government organisations working in the areas of education,
healthcare and livelihoods. Tata companies also extend social welfare activities to communities around
their industrial units. The combined development-related expenditure of the trusts and the companies
amounts to around 4 per cent of the net profits of all the Tata companies taken together.
Today, Tata Group comprises 96 operating companies in seven business sectors: information
systems and communications; engineering; materials; services; energy; consumer products; and
chemicals. The Group has operations in more than 54 countries across six continents, and its companies
export products and services to 120 nations.
Every Tata company or enterprise operates independently. Each of these companies has its own
board of directors and shareholders, to whom it is answerable. There are 28 publicly listed Tata
enterprises and they have a combined market capitalisation of about $101.3 billion (as on December 2,
2010), and a shareholder base of 3.4 million. The major Tata companies are Tata Steel, Tata Motors,
Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Global Beverages, Indian Hotels and
Tata Communications.
Tata Code of Conduct
This code serves as an ethical road map for Tata employees and companies, and provides the guidelines
by which the group conducts its business.
National interest
The Tata group is committed to benefit the economic development of the countries in which it
operates. No Tata company shall undertake any project or activity to the detriment of the wider
interests of the communities in which it operates. A Tata company’s management practices and
business conduct shall benefit the country, localities and communities in which it operates, to the extent
possible and affordable, and shall be in accordance with the laws of the land. A Tata company, in the
course of its business activities, shall respect the culture, customs and traditions of each country and
region in which it operates. It shall conform to trade procedures, including licensing, documentation and
other necessary formalities, as applicable.
Financial reporting and records
A Tata company shall prepare and maintain its accounts fairly and accurately and in accordance
with the accounting and financial reporting standards which represent the generally accepted
guidelines, principles, standards, laws and regulations of the country in which the company conducts its
business affairs. Internal accounting and audit procedures shall reflect, fairly and accurately, all of the
company’s business transactions and disposition of assets, and shall have internal controls to provide
assurance to the company’s board and shareholders that the transactions are accurate and legitimate.
All required information shall be accessible to company auditors and other authorised parties and
government agencies. There shall be no willful omissions of any company transactions from the books
and records, no advance-income recognition and no hidden bank account and funds. Any willful,
material misrepresentation of and / or misinformation on the financial accounts and reports shall be
regarded as a violation of the Code, apart from inviting appropriate civil or criminal action under the
relevant laws. No employee shall make, authorise, abet or collude in an improper payment, unlawful
commission or bribing.
Competition
A Tata company shall fully support the development and operation of competitive open markets
and shall promote the liberalisation of trade and investment in each country and market in which it
operates. Specifically, no Tata company or employee shall engage in restrictive trade practices, abuse of
market dominance or similar unfair trade activities. A Tata company or employee shall market the
company’s products and services on their own merits and shall not make unfair and misleading
statements about competitors’ products and services. Any collection of competitive information shall be
made only in the normal course of business and shall be obtained only through legally permitted sources
and means.
Equal opportunities employer
A Tata company shall provide equal opportunities to all its employees and all qualified
applicants for employment without regard to their race, caste, religion, colour, ancestry, marital status,
gender, sexual orientation, age, nationality, ethnic origin or disability. Human resource policies shall
promote diversity and equality in the workplace, as well as compliance with all local labour laws, while
encouraging the adoption of international best practices. Employees of a Tata company shall be treated
with dignity and in accordance with the Tata policy of maintaining a work environment free of all forms
of harassment, whether physical, verbal or psychological. Employee policies and practices shall be
administered in a manner consistent with applicable laws and other provisions of this Code, respect for
the right to privacy and the right to be heard, and that in all matters equal opportunity is provided to
those eligible and decisions are based on merit.
Gifts and donations
A Tata company and its employees shall neither receive nor offer or make, directly or indirectly,
any illegal payments, remuneration, gifts, donations or comparable benefits that are intended, or
perceived, to obtain uncompetitive favours for the conduct of its business. The company shall cooperate
with governmental authorities in efforts to eliminate all forms of bribery, fraud and corruption.
However, a Tata company and its employees may, with full disclosure, accept and offer nominal gifts,
provided such gifts are customarily given and / or are of a commemorative nature. Each company shall
have a policy to clarify its rules and regulations on gifts and entertainment, to be used for the guidance
of its employees.
Government agencies
A Tata company and its employees shall not, unless mandated under applicable laws, offer or
give any company funds or property as donation to any government agency or its representative,
directly or through intermediaries, in order to obtain any favourable performance of official duties. A
Tata company shall comply with government procurement regulations and shall be transparent in all its
dealings with government agencies.
Political non-alignment
A Tata company shall be committed to and support the constitution and governance systems of
the country in which it operates. A Tata company shall not support any specific political party or
candidate for political office. The company’s conduct shall preclude any activity that could be
interpreted as mutual dependence / favour with any political body or person, and shall not offer or give
any company funds or property as donations to any political party, candidate or campaign.
Health, safety and environment
A Tata company shall strive to provide a safe, healthy, clean and ergonomic working
environment for its people. It shall prevent the wasteful use of natural resources and be committed to
improving the environment, particularly with regard to the emission of greenhouse gases, and shall
endeavour to offset the effect of climate change in all spheres of its activities. A Tata company, in the
process of production and sale of its products and services, shall strive for economic, social and
environmental sustainability.
Quality of products and services
A Tata company shall be committed to supply goods and services of world class quality
standards, backed by after-sales services consistent with the requirements of its customers, while
striving for their total satisfaction. The quality standards of the company’s goods and services shall meet
applicable national and international standards. A Tata company shall display adequate health and
safety labels, caveats and other necessary information on its product packaging.
Corporate citizenship
A Tata company shall be committed to good corporate citizenship, not only in the compliance of
all relevant laws and regulations but also by actively assisting in the improvement of quality of life of the
people in the communities in which it operates. The company shall encourage volunteering by its
employees and collaboration with community groups. Tata companies are also encouraged to develop
systematic processes and conduct management reviews, as stated in the Tata ‘corporate sustainability
protocol’, from time to time so as to set strategic direction for social development activity. The company
shall not treat these activities as optional, but should strive to incorporate them as an integral part of its
business plan.
Cooperation of Tata companies
A Tata company shall cooperate with other Tata companies including applicable joint ventures,
by sharing knowledge and physical, human and management resources, and by making efforts to
resolve disputes amicably, as long as this does not adversely affect its business interests and
shareholder value. In the procurement of products and services, a Tata company shall give preference to
other Tata companies, as long as they can provide these on competitive terms relative to third parties.
Public representation of the company and the group
The Tata group honours the information requirements of the public and its stakeholders. In all
its public appearances, with respect to disclosing company and business information to public
constituencies such as the media, the financial community, employees, shareholders, agents,
franchisees, dealers, distributors and importers, a Tata company or the Tata group shall be represented
only by specifically authorised directors and employees. It shall be the sole responsibility of these
authorised representatives to disclose information about the company or the group.
Third party representation
Parties which have business dealings with the Tata group but are not members of the group,
such as consultants, agents, sales representatives, distributors, channel partners, contractors and
suppliers, shall not be authorised to represent a Tata company without the written permission of the
Tata company, and / or if their business conduct and ethics are known to be inconsistent with the Code.
Third parties and their employees are expected to abide by the Code in their interaction with, and on
behalf of, a Tata company. Tata companies are encouraged to sign a non-disclosure agreement with
third parties to support confidentiality of information.
Use of the Tata brand
The use of the Tata name and trademark shall be governed by manuals, codes and agreements
to be issued by Tata Sons. The use of the Tata brand is defined in and regulated by the Tata Brand Equity
and Business Promotion agreement. No third party or joint venture shall use the Tata brand to further
its interests without specific authorisation.
Group policies
A Tata company shall recommend to its board of directors the adoption of policies and
guidelines periodically formulated by Tata Sons.
Shareholders
A Tata company shall be committed to enhancing shareholder value and complying with all
regulations and laws that govern shareholder rights.The board of directors of a Tata company shall duly
and fairly inform its shareholders about all relevant aspects of the company’s business, and disclose
such information in accordance with relevant regulations and agreements.
Ethical conduct
Every employee of a Tata company, including full-time directors and the chief executive, shall
exhibit culturally appropriate deportment in the countries they operate in, and deal on behalf of the
company with professionalism, honesty and integrity, while conforming to high moral and ethical
standards. Such conduct shall be fair and transparent and be perceived to be so by third parties. Every
employee of a Tata company shall preserve the human rights of every individual and the community,
and shall strive to honour commitments. Every employee shall be responsible for the implementation of
and compliance with the Code in his / her environment. Failure to adhere to the Code could attract
severe consequences, including termination of employment.
Regulatory compliance
Employees of a Tata company, in their business conduct, shall comply with all applicable laws
and regulations, in letter and spirit, in all the territories in which they operate. If the ethical and
professional standards of applicable laws and regulations are below that of the Code, then the standards
of the Code shall prevail. Directors of a Tata company shall comply with applicable laws and regulations
of all the relevant regulatory and other authorities. As good governance practice they shall safeguard
the confidentiality of all information received by them by virtue of their position.
Concurrent employment
Consistent with applicable laws, an employee of a Tata company shall not, without the requisite,
officially written approval of the company, accept employment or a position of responsibility (such as a
consultant or a director) with any other company, nor provide freelance services to anyone, with or
without remuneration. In the case of a full-time director or the chief executive, such approval must be
obtained from the board of directors of the company.
Conflict of interest
An employee or director of a Tata company shall always act in the interest of the company, and
ensure that any business or personal association which he / she may have does not involve a conflict of
interest with the operations of the company and his / her role therein. An employee, including the
executive director (other than independent director) of a Tata company, shall not accept a position of
responsibility in any other non-Tata company or not-for-profit organisation without specific sanction.
The above shall not apply to (whether for remuneration or otherwise): (a) Nominations to the
boards of Tata companies, joint ventures or associate companies. (b) Memberships / positions of
responsibility in educational / professional bodies, wherein such association will benefit the employee /
Tata company.(c) Nominations / memberships in government committees / bodies or organisations.(d)
Exceptional circumstances, as determined by the competent authority.
Competent authority, in the case of all employees, shall be the chief executive, who in turn shall
report such exceptional cases to the board of directors on a quarterly basis. In case of the chief
executive and executive directors, the Group Corporate Centre shall be the competent authority. An
employee or a director of a Tata company shall not engage in any business, relationship or activity which
might conflict with the interest of his / her company or the Tata group. A conflict of interest, actual or
potential, may arise where, directly or indirectly…(a) An employee of a Tata company engages in a
business, relationship or activity with anyone who is party to a transaction with his / her company. (b)
An employee is in a position to derive an improper benefit, personally or to any of his / her relatives, by
making or influencing decisions relating to any transaction. (c) An independent judgement of the
company’s or group’s best interest cannot be exercised.
The main areas of such actual or potential conflicts of interest shall include the following: (a) An
employee or a full-time director of a Tata company conducting business on behalf of his / her company
or being in a position to influence a decision with regard to his / her company’s business with a supplier
or customer where his / her relative is a principal officer or representative, resulting in a benefit to him /
her or his / her relative. (b) Award of benefits such as increase in salary or other remuneration, posting,
promotion or recruitment of a relative of an employee of a Tata company, where such an individual is in
a position to influence decisions with regard to such benefits. (c) The interest of the company or the
group can be compromised or defeated.
Notwithstanding such or any other instance of conflict of interest that exist due to historical
reasons, adequate and full disclosure by interested employees shall be made to the company’s
management. It is also incumbent upon every employee to make a full disclosure of any interest which
the employee or the employee’s immediate family, including parents, spouse and children, may have in
a family business or a company or firm that is a competitor, supplier, customer or distributor of or has
other business dealings with his / her company. Upon a decision being taken in the matter, the
employee concerned shall be required to take necessary action, as advised, to resolve / avoid the
conflict. If an employee fails to make the required disclosure and the management of its own accord
becomes aware of an instance of conflict of interest that ought to have been disclosed by the employee,
the management shall take a serious view of the matter and consider suitable disciplinary action against
the employee.
Securities transactions and confidential information
An employee of a Tata company and his / her immediate family shall not derive any benefit or
counsel, or assist others to derive any benefit, from access to and possession of information about the
company or group or its clients or suppliers that is not in the public domain and, thus, constitutes
unpublished, price-sensitive insider information. An employee of a Tata company shall not use or
proliferate information that is not available to the investing public, and which therefore constitutes
insider information, for making or giving advice on investment decisions about the securities of the
respective Tata company, group, client or supplier on which such insider information has been obtained.
Such insider information might include (without limitation) the following: acquisition and divestiture of
businesses or business units, financial information such as profits, earnings and dividends,
announcement of new product introductions or developments, asset revaluations, investment decisions
/ plans, restructuring plans, major supply and delivery agreements, raising of finances.
An employee of a Tata company shall also respect and observe the confidentiality of information
pertaining to other companies, their patents, intellectual property rights, trademarks and inventions;
and strictly observe a practice of non-disclosure.
Protecting company assets
The assets of a Tata company shall not be misused; they shall be employed primarily and
judiciously for the purpose of conducting the business for which they are duly authorised. These include
tangible assets such as equipment and machinery, systems, facilities, materials and resources, as well as
intangible assets such as information technology and systems, proprietary information, intellectual
property, and relationships with customers and suppliers.
Citizenship
The involvement of a Tata employee in civic or public affairs shall be with express approval from
the chief executive of his / her company, subject to this involvement having no adverse impact on the
business affairs of the company or the Tata group.
Integrity of data furnished
Every employee of a Tata company shall ensure, at all times, the integrity of data or information
furnished by him/her to the company. He/she shall be entirely responsible in ensuring that the
confidentiality of all data is retained and in no circumstance transferred to any outside person/party in
the course of normal operations without express guidelines from or, the approval of the management.
Reporting concerns
Every employee of a Tata company shall promptly report to the management, and / or thirdparty ethics helpline, when she / he becomes aware of any actual or possible violation of the Code or an
event of misconduct, act of misdemeanour or act not in the company’s interest. Such reporting shall be
made available to suppliers and partners, too. Any Tata employee can choose to make a protected
disclosure under the whistleblower policy of the company, providing for reporting to the chairperson of
the audit committee or the board of directors or specified authority. Such a protected disclosure shall be
forwarded, when there is reasonable evidence to conclude that a violation is possible or has taken place,
with a covering letter, which shall bear the identity of the whistleblower. The company shall ensure
protection to the whistleblower and any attempts to intimidate him / her would be treated as a
violation of the Code.
Ownership and Corporate Structure
The two Promoter companies of Tata Group are: Tata Sons and Tata Industries. Tata Sons is the
promoter of all key companies of the Tata Group and holds the bulk of shareholding in these companies.
Tata Sons is the owner of the Tata name and the Tata trademark, which are registered in India and
several other countries. Tata Industries was set up by Tata Sons in 1945 as a managing agency for
businesses it promoted. Tata Industries' mandate was recast, in the early 1980s, to promote the Group's
entry into new and high-tech areas.
The Tatas used to manage their companies with very small equity stakes. Prior to restructuring,
in 1991, the Tata group was a loose confederacy of 300 companies having sales of around Rs 86 billion
and controlling an asset base totaling more than Rs 85 billion with minor ownership stakes. As a
consequence the chairmen of larger affiliates had grown accustomed to ruling their domains without
interference from the Tatas and once in a while competing with each other in a similar line of business.
In the administration of Ratan Tata, Tata Sons Chairman, decided to change all of this and have more
control. The Tata group restructuring involved various steps such as building Tata brand, reviving its
managerial recruitment and retaining practices (through, reviving TAS), changing the portfolio of
business lines, and most importantly making the group more cohesive, and controllable.
The ownership structure of Tata group shows signs of both “pyramid” and “cross-shareholding”
structures in-group firms. A “pyramid” denotes a hierarchical chain by which a family controls a firm,
and cross holding happens when a controlled firm owns any shares in its controlling shareholder or in
the firms along that chain of control (including any indirect means).
In early 2001, senior executives of the Tata Group, which include its top officer, Ratan Tata, the
corporate group’s executive chairman and the great grandson of J.N. Tata, have faced a protracted and
widely publicized accounting scandal that threatens to undercut the credibility and prestige of the
prominent organization and its founding family. This involves one of the Tata affiliate, Tata Finance
Limited, engaged in automobile financing, mortgaged lending, and consumer credit cards.
Tata Finance Limited is a public company that was promoted by Tata Industries Ltd. as its
wholly owned subsidiary. The Company was incorporated as a private limited company at Mumbai,
India on March 16, 1984 and converted into a public company on April 26, 1984.
On January 10, 2005, The Board of Directors of Tata Motors Limited (the Company) and Tata
Finance Ltd. (TFL) approved the merger of TFL with the Company. The merger was under a Scheme of
Amalgamation under Sections 391 and 394 of the Companies Act 1956 and was subject to the approval
of the Hon'ble High Court of Judicature at Bombay and took effect on April 1, 2005. In terms of the
Scheme of Amalgamation that would be submitted to the Court, all equity shareholders of TFL were
entitled to receive 8 Ordinary Shares of the Company of Rs.10/- each for every 100 equity shares of Tata
Finance Ltd. of Rs.10/- each. The exchange ratio for the number of shares of the Company to be issued
to the shareholders of TFL was based upon a valuation conducted by M/s Bansi Mehta & Co., Chartered
Accountants. The merger is expected to enable the vehicle financing business of Tata Finance to grow
stronger by leveraging its synergies of the direct business model with the dealer driven business of
Bureau of Hire Purchase and Credits (BHPC), a division of the Company. This merger will also allow the
TFL shareholders to participate in the growth of the Company, a leading automobile company in the
country and thereby significantly gain with an upside of dividend and shareholder value creation. The
merger will enable the Company to grow its auto financing business and offer complete solutions in line
with the global best practices in the auto industry. This will also enable the Company to provide a hedge
against the cyclicality of the automotive business and a significant value creation for its shareholders.
Nature of the Entity
Operations
Tata Finance is a non-banking financial company engaged in the business of hire purchase,
leasing and other finance related activities and also accepts fixed deposits from the public under its
various deposit schemes. It was primarily engaged in providing hire purchase for commercial vehicles
plant and machinery, equipments two wheelers and consumers durables. It was also engaged in
financing trade bills and engaging in money market operations. Other finance related activity includes
issuing of commercial paper as an interest reduction exercise in 1993. In 1994, the Company entered the
field of finance for construction equipment.
The Company has branches in Chandigarh, Jaipur, Calcutta, Baroda, Vishakapatnam, Madurai,
Vellore, Salem, Calicut and Cannanore and greatly improved its geographic coverage in the Northern,
Western and Southern regions of India.
Sources of funds are shareholder’s equity (issuance of equity share capital and preferential
share capital) and loan funds (both from secured and unsecured loans).
Investing
Tata Finance Limited has seven subsidiaries including Tata Finance Securities Limited, Niskalp
Investment and Trading Company, and Tata Home Finance. The Company acquired America Express
business in India which involves foreign exchange and credit card services. Recently, Niskalp Investment
and Trading Companyis known as Niskalp Energy Limited.
Financing
Shareholder’s equity (issuance of equity share capital and preferential share capital) and loan
funds (both from secured and unsecured loans) are the Company’s sources of funds. 60.16% of the
company’s equity shares were allotted to promoters, directors, and friends, 5% were issued to
employees and the 34.84% were issued to the public. 80% of the Company’s cumulative convertible
preference shares were allotted to promoters, directors, and friends, 5% were issued to employees and
15% were issued to the public. In 1991, 76.49% equity shares were issued to the erstwhile Tata
Industrial Finance Corporation.
Market
Transport and construction sectors are the major segments of the company’s business
activities. The company also undertakes leasing of plant machinery to a limited extent mainly to
corporate clients. It is also engaged in money market operations and finances other companies for their
different projects (e.g. TFL is the financier for the complete range of Hero Honda motorcycles of Hero
Honda Motors Ltd (HHML)).
Industry
Tata Finance Limited is a leading Non-Banking Finance Company (NBFC) from the Tata Group. It
has initiated steps to convert the company into a financial supermarket. Tata Finance Limited had a
dominance in the area of commercial vehicle financing and also in the area of car finance and corporate
leasing. The company till now has primarily serviced the industrial sector. A non-banking financial
company (NBFC) is a company engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government or local authority or other securities of
like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include
any institution whose principal business is that of agriculture activity, industrial activity,
sale/purchase/construction of immovable property. An NBFC must be registered with the Reserve Bank
of India (RBI) and have specific authorization to accept deposits from the public.
NBFCs are doing functions akin to that of banks, however there are a few differences: (i) a NBFC cannot
accept demand deposits (demand deposits are funds deposited at a depository institution that are
payable on demand -- immediately or within a very short period -- like your current or savings
accounts.(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to
its customers; and (iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in
case of banks.
The NBFCs that are registered with RBI are: (i) equipment leasing company; (ii) hire-purchase company;
(iii) loan company; and (iv) investment company. With effect from December 6, 2006 the above NBFCs
registered with RBI have been reclassified as (i) Asset Finance Company (AFC), (ii) Investment Company
(IC) and (iii) Loan Company (LC).
One of the services offered by Tata Finance Limited is hire purchase business.Hire purchase
(abbreviated HP) is a contract, in which two persons agrees to pay for goods in parts or a percentage at
a time. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price
for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase
contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full
price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the
goods at a predetermined price (usually a nominal sum) or return the goods to the owner.
Another service offered by Tata Finance is asset financing. Asset Finance Company (AFC) is a
financial institution carrying on as its principal business the financing of physical assets supporting
productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth
moving and material handling equipments, moving on own power and general purpose industrial
machines. This type of company may be further classified into those accepting deposits or those not
accepting deposits. A company incorporated under the Companies Act, 1956 and desirous of
commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act,
1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999).
Tata Finance is also engaged in mortgage loans in India. The growth of the mortgage loans in
India is boosted by the development of the real estate and increment in the activity pertaining to
construction. The mortgage loans in India were previously supplied mainly by the financial institutions
but now the commercial banks are also providing mortgage based loans to various types of customers.
The commercial banks provide mortgage loans on nominal rates of interest.
The objectives of mortgage loans in India are: to provide the customer with the best possible
services, to put emphasize on the quality of the credit and advance in form of mortgage loan and to
focus on management of income and cost. The main functions of the mortgage loans in India are
provided for: the purchase of four wheeled vehicles and two wheelers, the purpose of repayment of the
previous loans, meeting the expenses pertaining to medical, educational and marriage purposes,
undertaking renovation and repair works of the residential property, the purpose of purchasing land
plots, houses, construction of houses, meeting the needs for commercial, trade and other business
activities, and the requirements of the professionals for any kind of activities such as education, house
construction or purchase. The services offered under the Mortgage loans in India are: home equity
loans, mortgage refinancing, real estate lending, new home loans, latest mortgage quotes and debt
consolidation service. The Mortgage Loans in India is provided against collateral security such as
industrial property, urban commercial complex, residential house or apartment, possessed in the name
of the receiver of the loan. The security such as rented house can be accepted if that same property is
on a lease and the person should also have the authority to collect the rent under the power of
attorney.
Organizations offering Mortgage Loans in India: (Competitors)
* HDFC Bank Mortgage Service - Housing Development Finance Corporation (HDFC) Bank Mortgage
Service is leader in the Indian mortgage market at present with the State Bank of India (SBI) following
the lead
* Bank Of Baroda - Baroda Advance Against Property: Bank of Baroda Mortgage Scheme is one most
important mortgage schemes in the mortgage market in India
* United Bank of India - United Mortgage Scheme: United Bank of India Mortgage Scheme is one of
the most important part of the financial portfolio of the United Bank of India
* Bank of India - BIO Star Mortgage Scheme: Bank of India Mortgage Scheme provides high quality
financial product to fulfill the various requirements of the customers
* Union Bank of India - Union Mortgage Scheme: Union Bank of India Mortgage Scheme offers a
variety of financial products for the individual customers of various types
* State Bank of Mysore - Equitable Mortgage of Property: State Bank of Mysore Mortgage Loan is one
of the primary financial products of the State Bank of Mysore
Another service offered by Tata Finance Limited is the credit card business. A study by the
Indian Cards Council (ICC) revealed that there are a high number of inactive cards among the Indian
issuers. There were only 56% active cards in India as compared to 80% and 75% in Australia and
Singapore respectively. The RBI data also reveals that on a year-on-year basis; the card population fell by
5% or 1.36 million between February 2008 and 2009. Meanwhile the credit card base also shrank by
359,000 in February.ICC is an association of Mastercard Worldwide's banking partners in India.
Regulatory Body- Financial Regulatory Bodies in India
The financial system in India is regulated by independent regulators in the field of banking,
insurance, mortgage and capital market. Ministry of Finance, Government of India controls the financial
sector in India. The Reserve Bank of India is an apex institution in controlling banking system in the
country. It's monetary policy acts as a major weapon in India's financial market.
Securities and Exchange Board of India (SEBI), Functions of SEBI
The objectives of SEBI, as an important entity in the market it works with following objectives:
(1) it tries to develop the securities market, (2) promotes investors interest, and (3) makes rules and
regulations for the securities market. The functions of SEBI are the following: it regulates Capital Market,
checks trading of securities, checks the malpractices in securities market, enhances investor's knowledge
on market by providing education, regulates the stockbrokers and sub-brokers, and promote research
and investigation.
It is the duty of SEBI to inter alia protect the interests of investors in securities and to regulate
and develop the securities market. It also acknowledges that investors’ confidence depends on the
comfort afforded to investors that they are placed on equal footing and that they will be protected
against the improper use of inside information by the insiders. With this objective, section 11 (2) (g) of
the SEBI Act empowers SEBI to take measures for prohibiting insider trading in securities. The Insider
Trading Regulations have been framed as a measure to prohibit insider trading. The intention behind the
prohibitions provided in Insider Trading Regulations is inter alia to ensure that the insiders do not breach
the fiduciary duty or the duty arising out of a relationship of trust or confidence towards the investors.
Further, these regulations aim to achieve the objective of growth of securities market by ensuring that
the securities market operates in fair manner with all the participants having equal access to all the
information so that they can make informed investment decisions.
NSE India, National Stock Exchange India
In the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE)
in India. In 1992 the Government of India authorized IDBI for establishing this exchange. In National
Stock Exchange there is trading of equity shares, bonds and government securities. Presently there are
24 stock exchanges in India, out of which 20 have exchanges National Stock Exchange (NSE), over the
Counter Exchange of India Ltd, (OTCEI) and Inter-connected Stock Exchange of India limited (ISE) have
nationwide trading facilities.
Bombay Stock Exchange India
Bombay Securities Exchange (BSE) has played a pioneering role in the development of the Indian
securities market. Almost every leading corporate in India has sourced BSE's services in capital raising
and is listed with BSE. It had formulated a comprehensive set of Rules and Regulations for the securities
market. It had also laid down best practices which were adopted subsequently by 23 stock exchanges
which were set up after India gained its independence. BSE, as a brand, has been and is synonymous
with the capital market in India. Its SENSEX is the benchmark equity index that reflects the health of the
Indian economy.
BSE Indices: (1) The well-known BSE SENSEX is a value weighted of 30 scrips. Other stock indices
of BSE are BSE 500, BSEPSU, BSEMIDCAP, BSESMLCAP, and BSEBANKEX. BSE 100 Index: The equity share
of 100 companies from the list of 5 major stock exchanges such as Mumbai, Calcutta, Delhi, Ahmedabad
and Madras are selected for the purpose of compiling the BSE National Index. The companies under BSE
200 have been selected on the basis of their market capitalisation, volumes of turnover and other
fundamental factors. BSE 500 Index: BSE 500 Index consisting of 500 scrips is functioning since 1999.
Presently BSE 500 Index represents more than 90% of the total market capitalisation on Bombay Stock
Exchange Limited. As to statistics, companies listed to the end of March 1994 reached at 3,200
compared to 992 in 1980.
India Reserve Bank System
Reserve Bank of India is the apex monetary Institution of India. It is also called as the central
bank of the country. It acts as the apex monetary authority of the country.
Reserve Bank of India is aimed at protecting the interests of depositors and ensuring that the
Non-Banking Finance Company’s (NBFC) function on sound and healthy lines. This regulatory agency
requires companies to maintain a minimum “capital adequacy ratio” (CAR) for the maintenance of liquid
assets on its portfolio of deposits. The types of Non-Banking Finance Company’s (NBFCs) registered with
the RBI are: (1) Equipment leasing company: is any financial institution whose principal business is that
of leasing equipments or financing of such an activity. (2)Hire-purchase company: is any financial
intermediary whose principal business relates to hire purchase transactions or financing of such
transactions. (3) Loan company: means any financial institution whose principal business is that of
providing finance, whether by making loans or advances or otherwise for any activity other than its own
(excluding any equipment leasing or hire-purchase finance activity). (4) Investment company: is any
financial intermediary whose principal business is that of buying and selling of securities.
The Reserve Bank of India has set guidelines on corporate governance in non-banking financial
companies. RBI has advised the NBFCs through these guidelines in five major areas of operations such
as auditing, appointment of directors, risk management, disclosure and transparency and lending
policies. The extant instructions issued by the RBI are: constitution of audit committee, constitution of
Institute of Chartered Accountants of India
The Institute of Chartered Accountants of India is a statutory body established under the
Chartered Accountants Act, for the regulation of the profession of the Chartered Accountants in India.
The roles of ICAI are: to regulate the profession of Accountancy, education and examination of
Chartered Accountancy, exercise disciplinary jurisdiction, input on policy matters to government,
insuring standards of performance of members, formulation of accounting standards, prescription of
engagement and quality control standards, laying down ethical standards, continuing professional
education, financial report review, monitoring quality through Peer Review and conducting post
qualification courses. Involvements of ICAI in National Organizations are: drafting of Income Tax Laws,
Competition Law and Company Law, capital market development and regulation, corporate governance,
accounting and utilization of governmental resources, import-export policy, commercial and economic
legislations ,and non-banking financial .
RESEARCH QUESTIONS
Question 1. What are the criteria to be considered by the auditor to ensure that an independent audit
leads to the establishment of quality audit report?
Quality audit report results from conducting quality audit that considers regulatory, legal, and
ethical requirements. The criteria to be considered are the following:

ISA 220 (International Standards on Auditing), requires that the engagement partner
shall take responsibility for reviews being performed in accordance with the firm’s
review policies and procedures. (Ref: Para. A16-A17, A20). On or before the date of the
auditor’s report, the engagement partner shall, through a review of the audit
documentation and discussion with the engagement team, be satisfied that sufficient
appropriate audit evidence has been obtained to support the conclusions reached and
for the auditor’s report to be issued.

Also on ISA 220, for audits of financial statement s of listed entities, the engagement
partner should determine that an engagement quality control reviewer has been
appointed. Engagement quality control review is a process designed to provide an
objective evaluation, on or before the date of the auditor’s report, of the significant
judgments the engagement team made and the conclusions it reached in formulating
the auditor’s report. Engagement quality control reviewer is a partner, other person in
the firm, suitably qualified external person, or a team made up of such individuals, none
of whom is part of the engagement team, with sufficient and appropriate experience
and authority to objectively evaluate the significant judgments the engagement team
made and the conclusions it reached in formulating the auditor’s report. The
engagement partner shall not issue the auditor’s report until the completion of the
quality control review.

PSQC 1 (Redrafted), or national requirements that are at least as demanding, deals with
the firm’s responsibilities to establish and maintain its system of quality control for audit
engagements. It requires the firm to establish a monitoring process designed to provide
it with reasonable assurance that the policies and procedures relating to the system of
quality control is relevant, adequate and operating effectively.

The Code of Ethics for Quality Auditors requires that an engagement partner will be
honest and impartial, and served with devotion employers, clients, and the public. He
will also undertake only those audits compatible with the degree of training, experience,
and proficiency he/ she holds in regard to the technical or systems operations being
audited. He will also demonstrate a freedom of mind and approach which will ensure
objective viewing of the operation being audited. The engagement partner will be able
to document the professional qualifications needed in order to provide clear, objective
evidence of the degree of his/her technical and systems training. To insure quality audit,
the engagement partner must adhere to the fundamental principles namely integrity,
objectivity, professional competence and due care, confidentiality and professional
behaviour. Throughout the audit engagement, the engagement partner shall remain
alert, through observation and making inquiries as necessary, for evidence of
noncompliance with relevant ethical requirements by members of the engagement
team.
Question 2. What are the standards involved in withdrawing an audit report?
After the auditor has issued the auditor’s report and has discovered facts which might have
affected the report, he may refer to the Guidance Note on Revision of the Audit Report. This
explanatory note aims to provide guidance to members regarding revision of the audit report after the
same has been issued, in case the auditor considers necessary to do so. It lays down the procedures to
be followed by the auditor who, subsequent to the date of his report, becomes aware that facts may
have existed at that date which might have affected his report had he been aware of such facts at the
time of issuance of the audit report.

A revision of the audit report may be warranted in several instances involving reasons
such as apparent mistakes, wrong information about facts, subsequent discovery of
facts existing at the date of the audit report, etc. The revision of the audit report would
mean issuing a revised audit report as per procedure hereafter provided. The auditor
under no circumstances is permitted to withdraw in any manner whatsoever the audit
report once issued. However, the auditor may take steps to prevent reliance on the
audit report issued by him in the manner hereafter provided. It must be appreciated
that the revision of the audit report is a matter of great significance since confidence of
the stakeholders rests on the opinion expressed by the auditor in the audit report. Such
a step on the part of the auditor not only demonstrates the independence of auditor to
act in a free and fair manner but would also enhance confidence of the public at large
in the profession. Such a step on the part of the auditor not only demonstrates the
independence of auditor to act in a free and fair manner but would also enhance
confidence of the public at large in the profession. (Guidance Note on Revision of the
Audit Report)

SA 705 (Standards on Auditing) which deals with the auditor’s responsibility to issue an
appropriate report in circumstances when, in forming an opinion in accordance with SA
700 revised (Forming an Opinion), the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary. The decision regarding
which type of modified of opinion is appropriate depends upon the nature of the mater
giving rise to the modification, that is, whether the financial statements are materially
misstated or, in the case of an inability to obtain sufficient appropriate audit evidence,
may be materially misstated; and the auditor’s judgment about the pervasiveness of
the effects or possible effects of the matter on the financial statements.

Guidance Note on Revision of the Audit Report issued by the Council of the Institute of
Chartered Accountants of India states that when management neither agrees to
revise the financial statements nor agrees to ensure that anyone in receipt of the
previously issued financial statements and audit report thereon will be informed of
the situation and would be issued revised audit report, the auditor may also conclude
that withdrawal from the further engagement with the entity is necessary. Factors
that would affect the auditor's conclusion include the implications of the involvement
of the highest authority within the entity which may affect the reliability of
management representations, and the effects on the auditor of continuing association
with the entity. In appropriate circumstances, the auditor may consider seeking legal
advice.
Question 3. What is/are the threat/s posed by the engagement to the auditor?
Essential to the credibility of the auditor’s report is the concept of independence.
Before accepting an audit engagement, the auditor should consider whether there are any
threats to the audit team’s independence and objectivity and, if so, whether adequate
safeguards can be established.
Threats to integrity and professional behavior were faced by the audit firm upon the
acceptance of the engagement since AFF was to investigate the accounting scandal to which
Tata Finance was involved. This is created from questionable issues associated with the client
(its owners, management and activities). This would imply that the audit firm would be dealing
with a management that is involved with illegal acts and lacks integrity. Integrity implies not
merely honesty but fair dealing and truthfulness. An audit firm should not be associated with
information where he believes that the information contains incorrect, incomplete or
misleading statements. In professional behavior, the auditor should act in a manner consistent
with the good reputation of the profession and refrain from any conduct which might bring
discredit to the profession.
There is also a threat to professional competence and due care. AFF was retained by Tata
group to investigate the case after S.B. Billimoria & Co., the company’s previous audit firm
resigned. This change in professional appointment will require AFF to know pertinent facts such
as determining whether there are any reasons, professional or other, for resigning as auditors.
As noted by the managing partner, S.B, Billimoria presumes full honesty from their clients.
Having audited dozens of member companies of the Tata group, one of the threats posed
by the audit engagement is self-interest threat. This is because of AFF’s close affiliation with the
Tata group which enhances the audit firm’s stature and prestige within the country’s accounting
profession. Another circumstance regarding this self-interest threat is the concern about the
possibility of losing the engagement. It would be an advantage to AFF if they have a continued
affiliation with the Tata group knowing that it is the largest Indian corporate entity. Another
circumstance is potential employment with another Tata owned companies (i.e, auditing for
more Tata companies). AFF’s regard will be even more increased if they will be engaged to
more and more Tata companies.
There is also a conflict of interest between the clients, Dilip Pendse, the manager of
Tata Finance Limited and the Tata Group are in dispute with each other in relation to the
matter or transaction in question. A threat to objectivity or confidentiality can be faced by
the auditor. The principle of objectivity imposes the obligation on all auditors to be fair,
intellectually honest and free of conflicts of interest. They should not allow influence of
others to override objectivity. An auditor who acquire information in the course of
performing services shall neither use nor appear to use that information for personal
advantage or for the advantage of a third person.
Question 4. How should the auditor deal with these threats?
Once a threat that is other than insignificant has been identified and evaluated,
safeguards should be considered and applied as necessary. The Code of Professional Ethics
presents safeguards against self-interest threat. (Code of Ethics)
 Before accepting the new engagement, AFF, a professional accounting firm in public
practice should consider whether acceptance would create any threats to compliance
with the fundamental principles. Appropriate safeguards against threats to integrity
and professional behavior require that AFF obtains knowledge and understanding of
Tata Finance, its owners, and the manager Dilip Pendse, and those responsible for
governance. Client’s commitment to improve corporate governance or internal controls
should be obtained.
 Safeguards against threat to professional competence and due care include discussing
the client’s affairs fully and freely with S.B. Billimoria, asking Billimoria to provide any
known information on any facts or circumstances, that AFF should be aware of before
accepting whether to accept the engagement. AFF needs to obtain client’s permission
(preferably in writing) to initiate the discussion.
 Safeguard created by the profession, legislation or regulation which includes the
following: educational, training and experience requirements for entry into the profession;
continuing education requirements; corporate governance regulations; professional standards and
monitoring and disciplinary processes; and external review of a firm’s quality control system. Y.M.
Kale, a senior AFF partner who supervised the investigation was easily among the most respected
members of Indian’s accounting profession. An employee or partner of AFF for 30 years. Kale, who
served on the International Accounting Standards Board, was a former president of the Institute of
Chartered Accountants of India and had been elected to ICAI’s governing council 5 times. The ICAI is
the Indian federal agency that oversees the nation’s accounting profession, including its
independent audit function. He had also served as the Chairman of the ICAI board responsible for
issuing accounting standards. And at the time he was elected for the Tata Finance assignment was
the Chairman of the ICAI audit practices committee.
 Firm-wide safeguards in the work environment relate to the identification of threats,
the evaluation of the significance of such threat and the identification and application of safeguards to
eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level.
The leadership of the AFF should stress the importance of compliance with the fundamental principles
and they should establish the expectation that members of an assurance team will act in the public
interest. Seminars regarding ethical conduct should be performed at least annually especially those
who are at the top management. This will serve as an evaluation for the employees conduct and could
also be an event where they can discuss ethical issues. There should also be an annual retreat that will
give ample time for employees to reflect and improve their personal relationship with their God.
Improved personal and spiritual characteristics of employees is necessary for this will lead to doing only
good deeds as will be reflected in their conduct. These approaches will stress out the importance of
ethics in their work.
The AFF should have policies and procedures to implement and monitor quality control of
engagements. Documented policies regarding the need to identify threats to compliance with the
fundamental principles, evaluate the significance of those threats, and apply safeguards to eliminate or
reduce the threats to an acceptable level or when appropriate safeguards are not available or cannot be
applied, terminate or decline the relevant engagement should be established. A disciplinary mechanism
to promote compliance with policies and procedures is also necessary in the firm. This could be done by
having sanctions and penalties given to those who will violate with the given policies. Published policies
and procedures to encourage and empower staff to communicate to senior levels within the firm any
issue relating to compliance with the fundamental principles that concerns them should be observed.

Engagement specific safeguards that the AFF should implement is to have the other
partners who were not member of the assurance team review the assurance work performed or other
procedures as necessary. In the case of Tata, several partners of AFF performed a detailed review and
approved the issuance of the report but after part of it was leaked to the media it was withdrawn. This
implies that the other AFF partners had not conducted a thorough review of the report before it was
issued. Having known that the problem of the client was about the corporate governance structure of
the client, they should have discussed these issues with those charged with governance of the client and
provides recommendations for improvement. Disclosing to those charged with governance of the client
the nature of services provided and extent of fees charged. This will clarify that AFF does not have
undue dependence on the fees received from the engagement therefore objectivity is intact and not
threatened.
•
In addition, AFF may also be able to rely on the safeguards that the client has
implemented. Safeguards within the client’s systems and procedures, such as competent client
employees, strong corporate governance structure, and effective oversight of engagement work.
The root cause of the problem of Tata Finance Limited is the quality of their corporate governance
system. This is the problem that needs to be addressed. Strong corporate governance is then
recommended. Strong corporate governance calls for two main requirements: transparency in
decision-making, and accountability to ensure that responsibility could be assigned easily for actions
or inaction and also for the safeguarding the interests of the stakeholders and the investors in the
organization. Transparency in decision making involves making sure that the owners are aware of
the major decisions made. This discussion with the owners should be properly documented to serve
as a proof that the subordinate has permit to make the decision. Dilip Pendse was sued by the Tata’s
for breach of trust by engaging into transactions which brought losses to the firm and in which, the
Tata were not aware but Pendse claimed that it was permitted. This case proves that proper
documentation is needed. It also calls for the efficient supervision which encourages `doing
everything better' and protects the interest of the company while conforming to all established laws
and ethics. Strong corporate governance in any organisation needs to be principle based and smart,
moral, accountable, responsive and transparent.
Question 5. What recommendations can be made to reinforce the independent audit function?

To strengthen the independent audit function, one recommendation is to address the
need for additional rules or legislation on auditor independence. (Report to the Public
Oversight Board of the SEC Practice Section, AICPA from the Advisory Panel on Auditor
Independence) Many of the concerns that the panel has heard focused more on the
perceived lack of objectivity of some auditors in their acquiescence, approval, and even
advocacy of what critics believed to be questionable or inappropriate accounting principles
and practices of their clients. Integrity is the basis for public trust. The auditor should be
honest and candid and never to subordinate principle or professional judgment. Objectivity
gives value to the auditor services. The auditor should be impartial, intellectually honest,
and free from conflicts of interest. Independence requires an auditor’s freedom from both
the fact and appearance of conflicts of interest.

For firms that perform assurance engagements, documented independence policies
regarding the identification of threats to independence policies regarding the identification
of threats to independence, the evaluation of the significance of these threats and the
evaluation and application of safeguards to eliminate or reduce the threats, other than
those that are clearly insignificant, to an acceptable level.

Another recommendation is a better legal environment for auditor professionalism.
Litigation has had a damaging and costly impact on the profession and on the public it
serves by discouraging new entrants into auditing, by focusing business strategies and
management efforts within larger firms on nonaudit services entailing lower litigation risk,
by encouraging a proliferation of detailed standards to serve as a protection against secondguessing by litigants and thereby making audits more compliance and rule-book oriented,
and by creating an atmosphere in which auditors are reluctant to make independent
professional judgment. A better legal and regulatory environment will permit auditors,
without fear of exposure to unwarranted and excessive liability, to express their
professional judgment to board of directors as experts in accounting and financial reporting.
Further, this would encourage the profession to analyze and learn from audit failures.