Even as heads rolled in the global audit industry over the last two years, KPMG managed to steer clear of most of the big Enron-like fiascos. Plain luck? To an extent yes, but largely because KPMG has traditionally been less aggressive than other audit firms like erstwhile Andersen. Since 2002, it's been Mike Rake's job to ensure that the $12.16 billion (Rs 55,303.6 crore) firm, with a network of more than 100,000 audit professionals in 148 countries, stays above board. In India recently, the UK-based Rake, accompanied by India head, Ian Gomes, spoke to BT's R Sridharan on the learnings from the scandals. Excerpts:

The last couple of years have probably been the worst for the accounting industry. High-profile accountants have been caught with their pants down. Have the scandals changed the industry in any fundamental way?

The last two years have indeed been the worst for the reputation of the accounting firms. I think it is important to add that it has also damaged the reputation of all those associated with the capital markets and all operations of the capital market system. It hit heavily on the reputation of the investment bankers, the lawyers, non-executive directors, remuneration systems, the regulators, the credit rating agencies, the analysts and in some cases the newspapers and TV channels, in terms of what was picked up. Now we have to look at how do we move to restore the reputation of the accounting profession, how do we move to help, therefore, restore the reputation of the capital market system, indeed capitalism itself as a means of creating wealth for many, not just a few. We must accept constructive reform, we must accept transparency and accountability, we must have independent regulation of the accounting profession, which, by the way, KPMG has been saying since 1998. It is no longer acceptable to have trade associations and regulator mixed together within the institutes.

But clearly, this is not a problem specific to Andersen. KPMG had its own share of scandals. For example, the abusive tax shelter scheme in the US-it has come under heavy criticism. (Editor's note: A few weeks after the interview, KPMG's tax shelter partner Jeffrey Eischeid was removed from the post and put on administrative leave, and Deputy Chairman in the US, Jeff Stein, also stepped down.)

There's no point in saying that it's just America or Andersen. We have to accept that. I think the tax shelter is an interesting case because they gave incredible growth of wealth to individuals and corporates (in the US). It was demanded by the marketplace and everyone from law firms to banks to accounting firms was in the business of providing tax shelters and tax advice. And by the way, it was considered in many ways to be a part of the creation of wealth, and efficiency and competition in tax planning.

I think what you see now, looking back at it, is that it got very very aggressive indeed, and that's why we decided a couple of years ago to stop all of those kind of very aggressive tax shelters. Unfortunately, they chose to use the KPMG case study. Everyone else's (Editor's note: Ernst & Young and PricewaterhouseCoopers included) case study was the same.

It's one thing to bring in rules and quite another to translate them into values that your international partners live by. What has KPMG done on that front?

I believe it starts in the values and the culture of the firm itself. What does everyone understand by equality, integrity, objectivity, the way we relate to our people, our clients. These are incredibly important cultural things that we continue to work on. The second thing is the quality control processes. Here we have very tough and strict inter-office practice reviews to assess the quality of what's done. We also have this system called Sentinel that we've introduced so that there's no office, no partner anywhere in the world, that can do any (risky) work without getting prior approval from the Sentinel system.

"Auditors do not make companies go bust. Management do"

Coming back to the question of engagement, it's still the corporation or company that appoints the auditors. How independent can you really be if the guy who's paying for your pay cheque also calls the shots?

That, in theory, has been very clear. It's the shareholder who appoints the auditor. The responsibility of the auditor is towards the shareholders. Now, of course, in a public company, with a large, diffused shareholding, that's a pretty hard thing to get your hands around and that's why in a public company it's the audit committee that is really responsible to the auditors. I think what has happened in the last couple of years is a complete refocus to remind the auditor that he works with the management, he works for the audit committee and to remind the audit committee that it has a major responsibility to interact with the auditor. That they satisfy this to their independence, they satisfy they've brought the right issues to the table, they satisfy appropriate resolutions of those issues. I think you now see audit committees taking their responsibilities much more seriously. A strong, independent audit committee with a strong, independent auditor is what's required.

After Deloitte beat KPMG for Andersen, you said that there might be another from the Big Four that goes down because of the liabilities that come with Andersen. That hasn't happened. Do you still think there is a shakeout possible in the accounting industry?

It wasn't just Deloitte. Ernst & Young and everybody got bits of Andersen. What I've said, and several of my colleagues, is that there will not be any further voluntary consolidation of the accounting profession. Four is already too few. It would be better for the marketplace and the competition if it remained to six, that's clear. So we're never going to voluntarily go below that. We are campaigning hard for sensible reform, to go to proportional liability from joint and several. We've got an active discussion going and the government is looking at removing the unlimited liability in the United Kingdom, and it is being removed in Australia. So we need some kind of a sensible framework, where the auditors are still accountable for their share of their mistakes. But we can't have four firms effectively taking unlimited liability insurance for the whole of the corporate world. It's just not an effective model. Auditors do not make companies go bust. Managements make companies go bust. So getting some balance into this is extremely important. That's I think what we said.

Stemming from that, is it possible to create a new model of engagement between auditors and the management? Is that something KPMG is looking at?

Look, I've been in the business for more than 30 years, and in the best of the companies there has never been this issue.

I've had very good, strong, open communication between audit committees and auditors. We've taken big issues to the table. Most of the times you don't hear about it when auditors get things right. You only hear it when something goes wrong. But then too many things, I accept, too many things went wrong. I think the only way you can make this work is by getting the right balance, working with management, because you have to. If there's no corporation, you can't do audit. I'm working for the audit committee. Another thing that's important for people to understand is that when we start an audit, we start on the assumption that everyone is competent and everyone is honest. If we find they are not competent, we do extra work. If we find they are not honest, we resign. Because you can't do an audit if people are not honest, because you have to rely on representation, otherwise, you're nowhere, you will never stop auditing.

In India, the local audit firms are trying to keep the foreign guys out. What's your view on this?

It's strange, because I think the whole opening up and the liberalisation of the Indian economy in the last 15 years has been amazingly beneficial to India. I think the emergence of strong global Indian companies that are raising capital and other things need to have international accounting firms. That is absolutely essential. Essential for business, essential for economy, essential for jobs.

We started here 10 years ago, we're 1,000 people now, all of them are Indian nationals, Indian charted accountants. We provide them with training, greater opportunities, the ability to go abroad, create wealth and come back here. In the meantime, there is an enormous marketplace for accounting firms in India because India has a history of a ca profession. It is so far ahead in terms of ability than, say, China. And there's more than enough work for everyone to go around. We need competition. There's no threat here, only opportunity to the Indian accounting profession.

Finally, what are your plans for India in, say, the next five years?

First of all, we're absolutely delighted with what has happened in the last 10 years-zero to 1,000 people. We see enormous growth coming in the Indian economy, and we plan to continue to expand our resource capability, to add specialist resource, to recruit and train people, we'll have people moving elsewhere for the experience and then coming back to India. So India is one of the key emerging markets for us today and tomorrow. That's for sure.