Govt demand to bar IFIN auditors: Deloitte, BSR ban may leave big gap in Audit Inc's books
Such a move would take out two of the so-called Big Four and affect as many as 342 listed companies.
Such a move would take out two of the so-called Big Four and affect as many as 342 listed companies, said experts and executives. That would effectively leave just EY in the fray as PwC is already serving a ban for its alleged role in the Satyam Computer Services fraud, although that ends next year. The government has sought a five-year ban in the IL&FS case.
Beyond the big firms, companies will have to pick one of the smaller multinationals such as Grant Thornton, BDO, Baker Tilly and Mazars or pick a homegrown auditor.
AUTHORITIES ALSO AT FAULT
Not all of these necessarily have the bandwidth or expertise to examine the books of large enterprises.
The smaller firms will find it challenging to scale up but the fault also lies with the authorities.
“The government should have taken action against the MAFs (multinational audit firms) for violations pointed out in multiple authoritative reports over two decades, so that India would have had a healthy and balanced auditing profession today,” said Raghu Aiyar, CEO and senior partner, KS Aiyar & Co, a reputed Indian firm. “Now the Indian audit firms will have to scale up and they will have to meet the requirements of the country for auditing services. This transition will require time; it’s a practical issue as it involves migration of staff and clients.”
KPMG network firms audit 175 listed companies while the count is 167 for the Deloitte network. These companies account for about 40% of the market capitalisation of listed companies, according to Prime Database. It’s still not clear whether a ban will affect their networks in total. Deloitte has seven firms while KPMG has six in India. In PwC’s case, the Securities and Exchange Board of India (Sebi) banned the entire network. In India, the Big Four firms operate through separate local entities to abide by Institute of Chartered Accountants of India (ICAI) rules.
A ban may limit choice, increase risk, raise compliance costs and create new conflicts for companies, which will have to go through another audit changeover, said the people cited above. Equally, it would vastly open up opportunities for smaller firms from overseas and India besides ensuring that auditors take their jobs a lot more seriously and don’t ignore wrongdoing of the kind that has felled IL&FS and undermined the Indian financial system, they said.
After the Companies Act mandated rotation of auditors every five years to improve scrutiny in YEAR, top Indian companies switched among the Big Four and there was a marked shift away from Indian audit firms toward multinationals. KPMG won the most accounts among listed companies. Deloitte lost marquee clients but managed to replace most accounts.EY, KPMG and Deloitte accounted for about two-thirds of NSE listed companies by market value in FY19. They audited about 300 companies in the BSE 500.
Banning the two networks will mean India’s biggest companies having to move away from their preferred choice, said experts.
For instance, Tata Consultancy Services (TCS) is currently being audited by KPMG.
Being the internal auditor, EY can’t take up the statutory audit assignment. And PwC is still under a Sebi ban.
After the Reserve Bank of India’s ban on SR Batliboi, an EY member firm, from carrying out statutory audit assignments at commercial banks, HDFC Bank chose BDO.
To be sure, there have been rumblings globally over regulators doing something to limit the concentration of power among the Big Four firms.
This latest development makes clear why this needs to be addressed, especially as it’s not necessarily true that smaller firms aren’t capable, said Bharat Dhawan, managing partner, Mazars.
“After the audit rotation two years ago, the concentration of the Big Four has just increased and the regulators had to look at ways to de-risk this and expand the choice to 8-10 firms,” said Dhawan. “There are good firms beyond the Big Four, including some good Indian firms and regulators must consider something like joint audits for companies.”
Still, the Big Four play a key role in selling the India story abroad and also provide confidence to foreign investors that their investments are well-protected.
“It is not logical to ban the Big Four audit firms,” said a Singapore-based fund manager. “One cannot do business in absence of a stable and high quality audit environment. I don’t think this is going to happen. We will have to reorient our working relationships and that’s not helping in ease of doing business. My LPs (limited partners) need the comfort and global protection that comes with a global firm.”
Investors will look for a sound track record when it comes to audit firms they don’t know much about.
“Private equity investors may be comfortable with network firms associated with firms like Grant Thornton, BDO or Mazars as well,” said Padmanabh Sinha, managing partner, Tata Opportunities Fund. “But if left with few or no options with a strong brand and track record, there may be concern. Also, private equity investors have an active role on the board and in the selection of auditors etc., so the first test cases would probably be how foreign portfolio investors are reacting to the changes and the potential issue in large listed companies.”
In the event of a ban, EY should be at an advantage since audit committees of the bigger companies find comfort in hiring Big Four firms. But companies will have to keep in mind possible conflicts. Last year, EY rotated out of 60 companies among the top 300 on the BSE and can’t be hired again for five years under the Companies Law. Also, several top companies will be already working closely with the firm on tax, consulting and internal audit, so conflict of interest will further limit choice.
Audit firms could be frozen out for longer than the ban period. For instance, RBI barred EY for one year from auditing commercial banks but that translates into a potential six years. That’s because a bank will likely pick an auditor for the maximum five years before changing.