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8Ed.sol8.09 - CASE 8.9 TATA FINANCE LIMITED Synopsis In the...

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CASE 8.9 TATA FINANCE LIMITED Synopsis In the years following the Enron fiasco in the United States, several countries experienced their own “Enron.” In India, the business press labeled an accounting and financial reporting scandal involving Tata Finance Limited as that country’s “Enron.” Tata Finance is one of nearly one hundred public and private companies that make up the massive business conglomerate known as the Tata Group. During the late 19 th and early 20 th centuries, J.N. Tata, the founder of the Tata business empire, established India’s first steel company, textile factory, shipping line, cement factory, and the country’s first scientific university. Tata’s descendants would give India its first airline, automobile manufacturer, and domestically-owned bank. Presently, the Tata Group is India’s largest private sector employer and accounts for nearly 3% of the country’s annual Gross Domestic Product (GDP). In 2001, Tata Group’s senior management retained India’s largest accounting firm, A.F. Ferguson & Co. (AFF), to investigate the Tata Finance fraud. That fraud had greatly embarrassed the Tata Group, including its chief executive, Ratan Tata, the great-grandson of J.N. Tata. Throughout its long history, the Tata organization had been known for its uncompromising ethics and commitment to public service. In fact, J.N. Tata had decreed 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. However, that individual insisted that he had kept the Tata Group executives, including Ratan Tata, fully informed of Tata Finance’s financial affairs. As a result, 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 AFF report on the Tata Finance scandal linked them to that fraud. Eventually, AFF withdrew the report and fired the three individuals responsible for writing it, including one of their senior partners, Y.M. Kale, who was among the most prominent members of India’s accounting profession. AFF’s retraction of its 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 the 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 headline-grabbing 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.
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89 Case 8.9
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