In a clear pointer to the dominance of the Big Four firms in India’s audit landscape, the National Financial Reporting Authority (NFRA) has ascertained that their network firms in India perform the audit of listed companies that account for 75 per cent of the market capitalisation of India’s stock market.
Strong hold on India Inc
Moreover, the network firms of the Big Four — KPMG, EY, PwC and Deloitte — account for nearly 10 per cent (522 listed companies) of the 5,356 listed companies in NFRA’s regulatory jurisdiction, according to Rangachari Sridharan, Chairman, NFRA, the country’s independent audit regulator.
The fact that the Big Four firms have such a strong hold on Corporate India’s balance sheets explains their ability to influence policy outcomes in audit profession development in India, said corporate observers.
The globalisation of India’s capital markets and the pressure from investors who are comfortable with the Big Four is a major factor why companies opt for them as auditors. The concentration of big companies as clients with a handful of audit firms is also seen as unhealthy. Well-known home-grown audit firms have always complained of their inability to grow due to the dominance of the Big Four.
While their increased dominance is well known to the Government and the Institute of Chartered Accountants of India, there has been no urgency or concern or response from policy makers to address audit concentration in a few hands, they added.
As of end-March 2019, NFRA had identified 6,465 companies — based on the criteria in the rules — that came under its jurisdiction.
Of these, 5,356 are listed companies, 1,011 are unlisted companies satisfying the prescribed threshold criteria and 98 are banking, insurance and electricity companies.
In the listed entities space, NFRA has been able to obtain the names of auditors in respect of 5,023 companies out of a total 5,356 companies.
Diverse profile
The auditor profile of these listed companies is quite diverse, said Sridharan, at a recent industry event.
There are a total of 2,304 auditors who audit the 5,023 companies. Of these, 1,578 audit only one company each. At the other end, there are two individual firms that audit more than 100 companies each, he added.
NFRA jurisdiction covers public interest entities or PIEs. These are all listed companies; unlisted public limited companies with paid-up capital of ₹500 crore or turnover of ₹1,000 crore or aggregate loans, debentures and deposits of ₹500 crore.
Sridharan said the listed companies are exceedingly diverse in size and this perhaps is indicative of the need to define PIEs in a more restricted manner.
AMFI categorisation
To drive home this point, Sridharan cited the Association of Mutual Funds of India (AMFI) data which categorised listed companies into large cap, medium cap and small cap.
He said that the top 100 companies are classified as large cap. The market capitalisation of this category is from ₹13.46-lakh crore down to ₹37,746 crore. The next 150 companies are mid-cap. Their market cap goes from ₹36,954 crore to ₹11,819 crore. The remaining are small-cap, with market cap from ₹11,735 crore to ₹0.02 crore.
As many as 1,860 companies, out of the 5,059 in the AMFI list, have a market cap of less than ₹10 crore. The number below ₹100 crore is 3,276, Sridharan said.
“Would it be really possible to have an effective audit committee for the small listed companies is also one question we need to ask,” he added.