View: The Big Four are an asset to India
Any restriction on the Big 4 could have a serious impact both on equity and debt flows into the country.
As an NRI living in Singapore, I am a keen observer of business trends in India. The recent focus on the Big Four accountancy firms — KPMG, Ernst & Young (EY), Deloitte and PricewaterhouseCoopers (PwC) — particularly piqued my interest.(Disclaimer: I’m an alumnus of one of the Big Four firms.)
The Big Four appear to be in the frontline of a blame game with regard to business failures such as the one involving Infrastructure Leasing & Financial Services (IL&FS).
Not only are they being held out as culpable for major business failures, but they are also accused of restricting competition. The noise levels are high and the backlash could have unintended consequences.
The Big Four represent a large pool of talent in India, today employing perhaps 2,00,000 people. These firms have trained a large proportion of India’s financial talent, spanning the corporate, banking and investment sectors.
Their work has raised the quality of professionalism in the fields of finance and governance, and, indeed, have a role to play in Indian chartered accountants today being employed by global organisations in various roles.
Each of the Big Four globally has been looking to add even more talent to their Indian operations. These already supplement their global services with increasingly sophisticated skills and high-value services such as analytics and artificial intelligence (AI).
I worry that the loud allegations about the Big Four will not only hit the pause button on their plans to expand in India, but they will also impact entry of quality graduates into the profession.
Auditing is essentially an attest function that goes to enhance the trust level in the financial statements. For investors, especially those based overseas, much reliance is placed on the quality of auditors in often determining financial decisions, including when international loans are given to domestic companies.
It is not uncommon for loan agreements to have ‘audited by a Big Four’ as a precondition and a loan covenant — a breach of which could be considered by default. Any restriction on the big firms in India could have a serious impact both on equity and debt flows into the country.
One is mystified by the adverse focus on auditors. The bankers who lost money, clearly, made decisions for which they are paying the price in terms of financial losses. What can the auditor be held accountable for? Clearly, not for the decisions of the managers who invested in projects that failed. Nor for the decisions of bankers who would be expected to conduct diligence far deeper than the information in a company’s public reports.
An auditor can be held responsible if shown to have colluded with fraud, or if mala fide intentions are proven. They are serious matters that need to be properly established in the right courts of law. Even in such a scenario, distinction needs to be made between actions of individuals and firms.
Debarment of an auditor would not just considerably impact the firm’s operations, but would also affect all the employees who, mostly, have no nexus to the alleged fraud.
It’s claimed that the Big Four are restricting competition & should be investigated by the Competition Commission of India (CCI). This seems illogical. The number of companies audited by the Big Four is still quite small compared to the total number of companies in India.
Also, there are no entry barriers to set up auditing services. The Big Four operate in a hyper-competitive environment, whether to win clients or to hire and retain their people. And banning one or more of the Big Four won’t increase competition. It will reduce the choices available.
The Big Four, like all audit firms, should no doubt be held accountable to meeting regulatory standards and frameworks. But auditors can’t be expected to be prescient on business prospects that can turn volatile, uncertain, complex and ambiguous. Nor can they be forensic investigators, even as they should call out unusual transactions and arrangements that don’t meet their smell-tests.
While corporate managers, independent directors and the boards have critical roles in this regard, capital markets and investors look to auditors to enhance trust in financial reporting. This is an enormous responsibility.
But auditors should not be made to accept what, essentially, is the main responsibility of the management and the board.
In general, the Big Four have led the way in this regard by investing in technologies and training to increase the quality of audit services. The reputation they have built should be acknowledged as an asset to India.
(The writer is former chief financial officer, ICICI Bank)