MAFs have come under scrutiny as some got entangled in controversies such as those involving fraud-accused jeweller Nirav Modi or Infrastructure Leasing & Financial Services (IL&FS).
MUMBAI: The government should continue to allow multinational audit firms to operate in the country, said a ministry of corporate affairs panel report, a finding that should come as a relief for international networks, including the big four — Deloitte, PwC, EY and KPMG.
Being part of a multinational network and sharing global costs does not mean these firms are controlled or owned by international entities, said the committee of experts in a 200-page report, which ET has seen. The exercise followed complaints by Indian firms to the government that foreign ones were apparently flouting norms and gaining undue advantage. The fight between multinational auditing firms (MAFs) and Indian auditing firms (IAFs) intensified two years back in the wake of audit rotation mandated by the Companies Act 2013 that took effect on April 1, 2017. This led to several IAFs losing clients to multinational competitors. Foreign firms are not allowed in auditing, but MAFs operate through network firms that do not use the multinational’s brand name.
MAFs have come under scrutiny as some got entangled in controversies such as those involving fraud-accused jeweller Nirav Modi or Infrastructure Leasing & Financial Services (IL&FS).
Network firms of Deloitte were auditors to both, while a network firm of EY is the current auditor of IL&FS. In many bankruptcy situations too, network firms of the Big Four were found to be the auditors. Several domestic firms wanted the foreign ones barred from India.
However, the panel recommended that branding with international networks should be allowed and suggested that appropriate changes to respective laws and chartered accountant regulations be made in order to increase competitiveness. It also said that Indian audit firms that are members of international networks being set up as partnerships or limited liability partnerships (LLPs) under Indian laws do not violate the rules as long as all are are members of the Institute of Chartered Accountants of India (ICAI).
“Activation of the independent regulator NFRA (National Financial Reporting Authority), formation of multi-disciplinary partnerships, activation of global brands for audit including marketing and business promotion, transparency on non- audit service fees, are all steps aligned with the direction progressive countries have already moved towards,” said Vishesh C Chandiok, CEO, Grant Thornton India. “If implemented as suggested, the recommendations of the CoE (committee of experts) will improve audit quality, financial reporting and in the process ease of doing business in India.”
Indian firms alleged that the multinationals flout ICAI rules on two other counts. One, though the audit units of MAFs operate as separate partnerships and LLP entities, they share infrastructure, backend and support staff, practically operating as one firm. Two, larger firms indulge in brand-building activities and market their wide bouquet of non-audit services to clients, thus boosting the audit business.
“The burning issues of the Indian audit firms, that have diligently adhered to the laws of the land for decades, have not been addressed in the so-called expert report,” said Raghu Aiyar, CEO, KS Aiyar & Co, India’s oldest audit firm, who had complained against foreign firms in a letter to Prime Minister Narendra Modi. “While it would be too early to say what would be the next course of action for us, this is going to badly compromise India’s financial systems, by allowing Indian audit firms to collapse.”
MAFs dominate the market with the Big Four and two others, Grant Thornton and BDO, collecting about Rs 3,500 crore in auditing fees every year, according to industry estimates. The combined billings of the top 40 Indian auditing firms fall well short of the total fees of these six. Apart from this, the total revenue of the multinationals, which also offer other services, would be around Rs 15,000 crore, according to industry estimates.
The report also said the term MAF was a “misnomer”. Merely being part of a network and sharing global costs does not make these Indian network firms MAFs as they are neither owned nor controlled by the international network or entity.
Experts said that audit is the only one part of foreign firms’ multi-disciplinary business and each of the top MNCs has made substantial investments in other lines of service. MAFs export services worth nearly $1billion from India and employ more than 100,000 people in the country. Each of the Big Four has either the second or third largest workforce across across their global networks in India. EY alone employs more than 10,000 chartered accountants in India services and global shared service centres.
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