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Audit partners seek risk premium, more salary

They are seeking risk premium in the form of hikes and special bonuses, following actions Sebi and others.

, ET Bureau|
Last Updated: Dec 27, 2019, 02.47 PM IST
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Industry trackers said regulatory expectations had gone beyond professional standards and auditors were now being held responsible for business decisions and failures.
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MUMBAI: Audit partners at top professional services firms including the Big Four have started demanding a “risk premium”, as regulatory scrutiny is increasing over them and has on several occasions led to legal action.

They are seeking risk premium in the form of salary hikes and special bonuses, following actions by the Securities and Exchange Board of India, National Financial Reporting Authority as well as the Serious Fraud Investigation Office and Enforcement Directorate against audit firms and partners, sources said.

Regulatory scrutiny, investigation and legal action have increased against auditors in recent years following the unearthing of several alleged corporate scams, where the authorities have claimed they had failed to flag the wrongdoings.

“The audit partners want that they and their teams be compensated for taking the risk that could even land them in jail,” said a partner with one of the top multinational firms.

ET spoke to the India and audit practice heads of multinational audit firms as well as promoters and senior partners of top Indian audit firms. Most of them spoke on the condition of anonymity.

In some cases, the partners are demanding as much as a 25-30% salary hike and bonus equivalent to 40% of annual salary, said a senior partner. Lately, regulators have been going after audit partners of top firms. In October, the Economic Offence Wing of the Mumbai Police arrested audit partners of an EY India affiliate firm, SV Ghatalia & Co, for allegedly failing to flag lack of internal control mechanism at National Spot Exchange Ltd and allegedly conspiring with the exchange to project a “healthy picture” in the audit.

Bank accounts of some partners and senior executives of Deloitte Haskins & Sells and BSR & Associates, a KPMG affiliate firm, could be frozen after certain alleged irregularities were found at IL&FS Financial Services (IFIN) that they had audited. Ministry of Corporate Affairs (MCA) in August had moved National Company Law Tribunal and requested the tribunal to pass an order to freeze the bank accounts of 23 proposed respondents including that of auditors.

The NFRA, in a recent report, had also made allegations against Deloitte India partners and executives over their role in IFIN’s audit. These steps have caused panic among many audit partners, who fear they are being victimised even when real villains such as promoters, bankers, civil servants and other advisers are walking away.

The complaint is that even if other teams — like advisory or due diligence — give wrong advice to the audit client, the regulators are only going after auditors and partners signing balance sheets.

“Risk has increased for the audit firms due to the regulatory environment. As a firm we are seeing that often when our partners are not comfortable with certain positions taken by clients, we have been either moving out as auditors or stating our position in the audit reports,” said Nikhil Singhi, a partner at Singhi & Co, one of the biggest Indian auditing firms.

This is happening at a time when audit fees are under pressure following the implementation of the audit rotation rule. According to industry insiders, most of the top professional services firms — mainly the big four of EY, PwC, KPMG and Deloitte — were growing at about 20% annually, but their audit revenue was either stagnant or expanding at a much slower pace.
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The total revenue of the top firms —the Big Four plus Grant Thornton and BDO — could be around Rs 15,000 crore from their India operations. Within the big four, the audit business is Rs 2,200-2,500 crore, but it is a steady business.

“The profession is in a state of transition. When a scam breaks out, there is an immediate reaction and auditors are being blamed or criminal action is being taken against them. The various stakeholders don’t distinguish whether an auditor is involved or not or has been negligent or despite his best efforts could not figure out a well-crafted scam,” said Ved Jain, a former president of the Institute of Chartered Accountants of India.

Industry trackers said regulatory expectations had gone beyond professional standards and auditors were now being held responsible for business decisions and failures. Though the proportion of audit business has been going down steadily (17-21% in the big four firms) and there is increasing risk of regulatory action, for the professional services firms, it provides a good entry into clients and a few profitable services can be then cross-sold.

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