Accounting/Auditing firm PWC in trouble for Global Trust Bank problems

It has been 3 years now since Global trust bank collapsed.

It was a Saturday in 2004, when the news came in about GTB bank being ordered to close down by the regulatory authorities. There was a widespread panic among the account holders of GTB bank. They were afraid about the money they had deposited in GTB bank accounts. Many private organizations had their employee’s salary accounts in GTB banks. All these people panicked. Moreover, since the news came in on Saturday, no one could do anything. ATMs were blocked, all bank branches closed. Account holders gathered at ATMs and branches with their debit cards and check-books, but no one was allowed to withdraw money from their accounts.

Banks are considered to be safest organizations – this assumption is very incorrect. The world of finance is full of examples where centuries old major banks have collapsed within a matter of days. Barings bank, GTB bank, just to name a few.

Situation was worse for the shareholders of GTB bank. Being a Saturday, there was no trading. Coming Monday, when the markets opened, there were only sellers and no buyers. The stock went down from 8 Rs a share to 2 Rs. and later to zero. The bank had collapsed completely and the stock investors were the ones who lost miserably. Though I was fortunate enough not to have any holdings of GTB stock in my portfolio, but I still cannot forget the look on the face of a colleague who had GTB stocks worth 30,000. That day, 30,000 of his holdings were translated to zero, or a 100% loss.

Later, Oriental bank of commerce acquired GTB. The bank account holder’s money was safe, but the people who lost dearly were the stockholders of GTB.

No equity research analyst, no fund manager, no auditor was able to predict the destiny that GTB stock had met. Instead, it was suppose to be an emerging star of the banking midcaps.

Why am I raising this issue of GTB today after 3 years? No, I’m not going to quote it as another straightforward example of risk in equities, but I want to highlight another debate that has recently begun.

Accounting firm Pricewater House Coopers or PWC was responsible for auditing the bank records of GTB. Banks have a class of assets or holdings, which may result in losses. This falls into the category of NPA or Non-performing assets. The higher the value of NPA for a bank, the worst is its performance. For example, NPA may be coming from the defaulted loans that bank has given to people who defaulted on payment on loans and bank has no way to recollect it back.

Pricewaterhouse coopers was doing auditing of the records of GTB bank and yesterday it came to light that PWC did not report the high level of NPA that GTB bank had. Instead, while doing accounting, it reported a very low level of NPA which was way below the actual figure. Now, the regulatory authorities are going to launch an investigation in which PWC practices have become questionable. PWC can face severe problems, which may include barring it from continuing accounting or auditing work in India for a period which may range from 3 months to 10 years.

The point that I’m trying to make is that it took 3 years for the regulatory authorities to just come up with the charges against the alleged malpractices and the firms and people involved. How long further it will take for the truth to come out, I guess even God cannot tell. Even after the truth is revealed, can the stockholders of GTB get anything – NO. All they can do is repent on their investment decision and think about maintaining caution for further investments. The truth is that the bank collapsed in just 1 day – though being advised as a midcap star performer just few days back.

No fund manager or researcher could guess the destiny of GTB bank. The reason, all their recommendations and investment decisions were based upon the balance sheet analysis, profit and loss account – which ultimately proofed to be erroneous. It’s all there in the past – what will be happening in the future no one can tell with confidence.

Trusting the balance sheets, profit and loss account, Earnings per share EPS, or similar such figures reported in the quarterly or annual financial results can be very risky. It’s easy to say that if there are any problems in the financial reports, the management and governing body members will be put behind bars. However, the truth is that it’s the investors like you and me who loose money. What would an investor get if the financial officer of a bankrupt company is sent to prison? The investor gets nothing – instead he looses his investment. By the time the reality is revealed, it’s too late.

Chasing midcap performers is easy, taking risk is also easy. Let’s just keep in mind the case of GTB bank – 3 years, yet to trace the culprits.

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