Why is there still a shortage of big Audis in India?
Growing economy and domestic companies – the paradox
It is ironical that India is on the verge of becoming the third largest economy; Its accounting industry is dominated by large foreign networks or their Indian affiliates. Major Indian companies rely on foreign networks’ audit methodology, intellectual capital and technology platforms without being accountable to Indian regulators. Many companies connect with overseas networks for ‘brand optics’, creating the illusion of professional and technical cooperation. The National Financial Reporting Authority (NFRA) has found audit deficiencies in its disciplinary and inspection reports in respect of ‘multi-national’ audit firms which are fundamental to audit quality. Recently, there have also been security concerns around data governance and accountability in access, use and retention in AI models and IT systems deployed by these firms for work done for governments and institutions of national importance.
Reform Audit Fees: Underpaid, Underresourced and Sub-optimal Delivery
The problems of the accounting industry in India are well known and need not be elaborated upon. However, underpinning all is an unviable audit fee model – leading to under-resourced teams, weak audit efforts, inadequate audit infrastructure, poor technology adoption and adaptation, a dwindling pool of high-quality talent in audit – and a ‘strong bias’ by governments and large companies in favor of MNC companies, with otherwise competent and capable domestic firms being overlooked. Debate and discussion have recognized it as an issue but failed to give it the importance it deserves.
Regulatory and market pressures should force companies to set audit fees commensurate with the nature, size and complexity. SEBI (Securities and Exchange Board of India) should order audit committees to disclose in the annual report the basis adopted for selecting the appropriate audit firm and determining the reasonableness of audit fees. Authorities like NFRA, RBI and SEBI should examine the process of selection of audit firms and the reasonableness of audit fees in their investigations or inspections, as is being done by the PCAOB in the US and the FRC in the UK. Fees lower than reasonable should prima facie indicate compromise with the audit quality or independence of the auditors. The Auditing Standard on Quality Control provides adequate guidance on this.
Eliminate strong prejudices – being big is not a curse, but one should go on the basis of merit, not on the basis of seniority or size
Qualification and relevant experience should be given priority over size, revenue or seniority in selection of a firm.
Currently, the Big 6 handle about 65 per cent of Nifty 500 audits and cover about 45 per cent of NSE market capitalisation, highlighting the dominance of foreign-affiliated networks.
Selection should be based on a two-part bidding model – technical qualification bid first and financial bid second, subject to a benchmark floor level of fees – rather than criteria designed to suit pre-identified audit firms. The idea is not to look down on large MNCs, but to suggest progressive localization of high-value PSU and BFSI audits to demand capable local companies and create competitive pressure on MNCs.
To prepare domestic companies to enhance their financial and technical capacity
Structural support will be needed to strengthen domestic firms. This also includes:
- A development fund to promote large domestic companies
- Fiscal incentives like tax benefits and preferential empanelment
- Allowing private equity participation with safeguards, including majority control by Indian chartered accountants and strict conflict of interest norms
The use of transformative technology has become a strategic imperative and at the same time, it is beyond the reach of domestic companies. The Development Fund should develop a state-of-the-art integrated audit technology platform covering documentation, sampling, analysis and standards compliance. Considering the huge time, effort and investment involved, it should be deployed in phases: starting with the top 100 firms and integrating mandatory capacity building. It can then be rolled out nationally over five years, free for smaller companies and on a user-fee model for larger companies.
Inspire domestic companies to think big, plan and act
A major issue, indeed a major hurdle, that has not been addressed so far is to strengthen CA curriculum and practical training, so as to bridge the gap between the individual capability of CAs and their ability to envision, plan, strategize, organize, and operate a large firm, national network, or global network. CA courses and post qualification CPE need to focus on these enabling skills, in addition to accounting and auditing expertise. Giving up control over one’s founder-owned firm to become part of a network of multidisciplinary firms spanning different jurisdictions requires the ability to see a bigger picture, and considerable leadership, organizational and inter-personal skills.
Regulate so as not to disrupt the network but rather follow a compliance or interpretation model
While ICAI has introduced guidelines to regulate the network and the government is deliberating on various measures to facilitate MDP, what is lacking is a template-based, disclosure-driven ‘network governance’ framework. It appears that efforts are more towards suppressing operational flexibility rather than enabling regulatory oversight (not monitoring). ICAI and the government should develop a model network governance template specifying minimum standards for management, quality control protocols, brand usage and conflict of interest. Networks adopting the template should be expected to comply with or publicly explain deviations on the model corporate governance code. Networks must publish annual transparency reports along the lines of the UK and US, including disclosures on network governance and arrangements.
Status quo is not an option – reform of domestic companies is a strategic imperative
Reports of the government setting up separate institutions to handle education, examination or disciplinary functions from ICAI, ICSI and ICMAI reflect the temptation to reach for structural reforms rather than substantive reforms. The profession does not need new institutions, it needs ICAI and MCA to act decisively on the measures mentioned above. There is a strategic need to enhance the structure and stature of the audit profession. The status quo is and will continue to lead to an existential crisis for Indian audit firms.
The author is a former secretary of ICAI
