Threat to auditors

The news that the Government plans to permit more foreign audit firms to offer services in India has created a stir in the auditing community. Many foreign accounting firms have been practising here in a surrogate way, by networking with Indian firms.

The case to permit more foreign accounting firms may have some substance if there were none present in India. In any market, there is no doubt that competition is welcome but permitting additional competition also depends on how the market is structured. Currenly, Indian accounting firms operate under limits as to the number of statutory and tax audits they can undertake with an intention to ensure quality.

The jury is still out whether this has actually resulted in an improved quality of audit services. Permitting more firms to join the population is only going to add to this artificial restriction.

Audit service receivers in India are extremely price-sensitive. Many entities in India consider the audit function to only be a matter of compliance for which they are prepared to pay only so much. The ratio of the risks that any auditor takes vis-à-vis the reward he gets is extremely skewed in favour of the risk. If more foreign accounting firms enter India, they are only going to upset the pricing for some of these services.

It is also a known fact that Indian accounting firms do not get to service the entire market that needs their services. Many multinational companies, private equity funds and venture capitalists have an inbuilt mantra to only appoint foreign accounting firms as auditors for their investees.

Thus, though there is a tremendous boom in terms of FDI as well as startups, Indian accounting firms do not have their skin in the game in many of these areas as they are unable to offer their services to such clientele. The argument for permitting more foreign accounting firms to operate in India is that given the significant exposure of global investors in Indian firms, they need auditors whom they are more comfortable with.

More global players will mean more choice and better quality of services. The problem with this argument is that the days of choosing an auditor we are comfortable with are long gone. In the present times, entities need to choose an auditor which can present an impartial report on the accounts of the entity without worrying about anyone’s comfort levels.

There was a thought that the rotation of auditors mandated by the Companies Act 2013 would bring in more audit work to local accounting firms. However, the reality on the ground is that the rotation of auditors is taking place through a negotiated process rather than an open-to-all bidding process. Such happenings defeat the very purpose for which rotation of auditors was introduced. The European Union has discovered that having a system of joint auditors works better than rotations.

Maybe the Government can indulge in some contrarian thinking and enable a global audit firm to emerge from India. A group of mid-size firms can get together and partner/merge with mid-size audit firms abroad. The merger with firms abroad is essential because Indian firms cannot offer their services directly abroad. The Government need not facilitate the merger, but they can make it easier by denying traffic from flowing in the opposite direction.

The writer is a chartered accountant

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