Govt proposal to hold auditors responsible for defaults draws flak

nNEWDELHI: Industry has opposed the government’s proposal to make auditors responsible for pre-empting potential defaults by companies they inspect, and asked the ministry of corporate affairs (MCA) not to place restrictions on the Big Four global audit firms – PWC, KPMG, Deloitte and EY – on grounds of oligopoly, people with knowledge of the matter said.

The industry has proposed that the government instead help domestic auditors build capabilities, the people said, requesting anonymity. PWC, KPMG, Deloitte and EY, formerly known as Ernst &n Young, operate in India through a network of domestic chartered accountant firms.

To ensure auditors’ independence and enhance their responsibilities, MCA in February invited suggestions from stakeholders on proposed legal change. The Associated Chambers of Commerce and Industry of India (Assocham), the Federation of Indian Chambers of Commerce and Industry (Ficci), Confederation of Indian Industry (CII) and the American Chamber of Commerce in India (Amcham) recently submitted their feedback to the government, a government official said requesting anonymity.

Spokespersons for the MCA, PWC, KPMG, Deloitte, EY, Amcham did not respond to emailed queries. Ficci, CII and Assocham confirmed that they had submitted their views to the government.

In a discussion paper, the government highlighted the oligopoly of the four global auditors and the need to build the capacity of home-grown Indian firms at par with global organisations.

“The majority of large global corporations use the ‘Big Four’ accounting firms for auditing their financial statements. Such audit market concentration of listed firms is characterised by an oligopoly of ‘Big Four’ audit firms and would result into inadequate degree of competition in large-company audits,” the paper said.

The official mentioned above said the government’s purpose was to create a robust advance warning system that would help check defaults like those by Infrastructure Leasing and Financial Services Ltd (IL&FS), Dewan Housing Finance Corporation (DHFL) and Punjab and Maharashtra Cooperative Bank (PMC Bank) that took place recently.

CII didn’t agree with the government’s view. “Based on published information only 26% of the top 1,800 listed companies are audited by the Big 4 firms and the remaining 74% are audited by other firms,” it said in its submission to the government.

Commenting on the matter, Assocham president Niranjan Hiranandani said: “The economic concentration on audit of the Big 4 is because they are internationally recognised names for audit quality.

If a company wants to get FII [foreign institutional investment], FPI [foreign portfolio investment] or PE [private equity] investors for its equity or debt - they want audits done by internationally recognised names.”

Some of the Big Four ave been in the profession for over 100 years, said PR Ramesh, former chairman of Deloitte India. “While they were always the large firms even several decades ago, they have further expanded over the years through mergers to become their current size. What is required here is a need to encourage consolidation of other firms. There are a number of medium-sized firms who can become equally big,” he said.

Jamil Khatri, partner and head of audit at BSR & Co LLP, said large companies naturally prefer to hire large audit firms given the size, complexity and geographical coverage of their own operations.