Why FDI policy stipulating joint audits may not help Indian firms

Last week the government amended the foreign direct investment (FDI) policy to stipulate ‘joint audits’ for the Indian investee company in cases where the foreign investor specifies a “particular auditor/audit firm having international network”. This is the first time that the government has brought in a rider relating to appointment of the auditor in the FDI policy. “The audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network,” the policy statement said.

Though this throws up new business opportunities for audit firms in India, the move may not wholly benefit Indian-owned audit firms. Small and mid-sized Indian audit firms are not part of international networks. Though technically they could qualify as the second auditor, the way the policy statement has been worded it does not keep away another international network to pitch for the same job. “So, technically two international networks could still do joint audits,” said India head of an international audit network, who did not want to be quoted.

Many in the audit fraternity — especially those from small and midsized firms — feel the wordings in the statement are something akin to a “bureaucratic bungling”. “The

FDI policy should have mentioned that the joint audit would be done by one network firm and another non-network firm,” said chief executive officer of a mid-sized audit firm that is not part of any international network.

“The proposed policy does not state that the join auditor should be an Indian audit firm,” noted Raghu Aiyar, chief executive officer & senior partner, KS Aiyar & Co. However, there is another catch here for desi-audit firms. International audit network operate out of India through Indian-owned audit firms. “All the multinational audit firms will identify as Indian, which they have anyways been claiming forever,” he added.

Another issue, point out many in the audit fraternity is that, foreign investors may decide not to specifically mention the name of the auditor in Shareholder Agreement with the Indian investor. “In that case the joint audit clause will not apply,” said another auditor.

International audit networks have been against the idea of joint audits, even though the Companies Act has enabling provisions to allow such appointments. Public sector banks have been following the practice of joint audits. However, corporate India has been resisting the idea on the ground that it will lead to increase in compliance costs. The Institute of Chartered Accountants of India (ICAI), the accounting practice regulator, has been pitching with the government to make joint audits mandatory for companies of certain size.

Some experts feel foreign investors have been seeking a say in choice of auditors in keeping with their global practice. The government’s move to allow joint audits in certain ventures may enhance the audit market in India, but may not specifically benefit Indian audit firms, especially the small and mid-sized ones.

A section of the audit fraternity has been pitching with the government to check the growing influence of international audit network in Indian market. The Prime Minister, while addressing the auditor community last year, had stressed on the need for creation of global audit firms out of India.

Rotation of audit firms mandated by the new company law three years ago has helped international audit networks strengthen their hold in India. The churn in the audit market has snapped some decades-old ties, hitting small firms that were dependent on a handful of clients. The ‘Big 4’ audit networks — Deloitte, EY, KPMG and PwC — have been more aggressive in building their client base in India in the past three years.

A section of the audit fraternity has been pitching with the govt to check the growing influence of international audit networks in Indian market