Is the time finally ripe for PM Modi's desi Big 4? Here are the odds
India is in need of foreign money. Global investors feel confident when a MNC auditors is involved in a business.
As the shadow of severe action looms over Deloitte Haskins & Sells and BSR & Co — a part of KPMG network — in the aftermath of IL&FS, the fate of big audit companies again appears to be under a cloud. The government-appointed board of IL&FS has sought action against the two for failing to flag the shortcomings found during the auditing of IL&FS Financial Services.
Foreign firms are not allowed here in auditing, but global auditors operate through network firms that do not use the multinational’s brand name.
A while ago, the Institute of Chartered Accountants of India (ICAI) also wanted details of revenue, investments and corporate structures of top multinational audit companies in India — incluing KPMG, EY, Deloitte, PricewaterhouseCoopers, BDO and Grant Thornton.
The National Financial Reporting Authority and the Serious Fraud Investigation Office (SFIO) have also begun probing the role of the auditors in cases linked to IL&FS.
Price Waterhouse is already serving a Sebi ban over the Satyam fraud case — under which it can't audit listed companies in India for two years.
The current travails of the MNC auditors could present Indian audit firms with an unparalleled opportunity to rise to the occasion, analysts say.
The Modi connection
Indian audit firms, in a petition to Prime Minister Modi some time ago, had voiced concerns about the hegemony of the Big 4 and the absence of a level-playing field. The Corporate Affairs ministry subsequently set up a committee to look into the matter. The ICAI had also came out in support of local auditors.
PM Modi, at the time of the launch of GST, said he wished Indian firms could make a place for themselves among the world's top auditors.
"People talk of the Big 4 accounting firms. Sadly, there is no Indian firm there. By 2022, let us have a Big 8, where four firms are Indian," Modi said on ICAI's Foundation Day a few years ago.
The PM rightly recognised there were no Indian firms of standing comparable with the multinational audit firms, said a senior partner at a domestic audit firm. "That imbalance needs to be corrected by creating four big Indian audit firms. Indian audit firms have drastically declined over the past two decades and the multinational audit firms have turned into dominant monopolies. After audit firm rotation cycle (mandated by the Companies Law), the client base of the Indian audit firms has evaporated, while the multinational audit firms walk away with the lion’s share of the audit fees," he said.
Local vs Global: How it all stacks up
Domestic audit companies allege that multinationals win big accounts in India using their heft. Multinationals, on the other hand, back their case saying local auditors don't have what it takes to audit large accounts.
The long and bitter feud, which lies at the centre of this storied rivalry, took an even bitter turn when local auditors lost out many big accounts to MNC rivals during mandatory rotation in 2017-2018.
The Companies Law mandates an audit rotation cycle. After this law came into effect, many Indian auditors lost work to their foreign counterparts.
Local auditors say that just a few large Indian audit firms have been left been left in the race now and that their market share has consistently fallen. Big Indian firms have deliberately used the mandatory rotation to replace Indian auditors with global biggies, insiders say.
Indian audit firms have tried hard for equal opportunities, unsuccessfully so far. They have even proposed joint audits as a solution.
Not as easy as it looks?
According to an ET story, other than the big six — EY, Deloitte, KPMG, PwC, Grant Thornton and BDO — there are less than 25 Indian firms with more than 20 partners.
Deloitte and KPMG — on whose heads a sword now hangs — audit over 250 companies that collectively have 40% of the m-cap of India's listed entities. If they are banned in the same manner as PwC was, India won't be left with enough good replacements.
There is another — some say more important — reason why India can currently ill-afford a ban on entities such as the Big 4. India is a country in dire need of foreign money. Global investors feel more confident to bring in money when one of the top MNC auditors is involved in a business.
The government also seems to have taken these risks into account, for now. India should continue to allow global auditors to operate here, the Corporate Affairs ministry said in a report late last year after it found many of the concerns irrational.
As per industry data for 2018, the big six has absolute domination of the Indian audit scene, pocketing over Rs 3,500 crore in fees annually. The combined annual collection of all top local auditors is just a patch on the big six's bounty.
Multinational auditors employ more than 1,00,000 people in the country, an ET story says. Each of the Big Four has either the second or third largest workforce across their global networks in India. EY alone employs more than 10,000 CAs in India services and global shared service centres.