‘Daunting task to create Big 4-like audit firm out of India’
May 24, 2024
Investment curbs, networking constraints among challenges.
The government’s ambition to create a Big 4-like audit firm out of India has again become a talking point in the auditing industry, thanks to the finance minster Nirmala Sitharaman’s recent statement, urging the Institute of Chartered Accountants of India (ICAI) to try and set up an Indian auditing firm which can join the league of Big Four.
However, people in the auditing circles, including partners in the Big 4 and mid-sized Indian firms, remain sceptical of this ambition due to a host of issues.
“Just on the basis of audit services, it’s challenging to become a large firm. The Indian firms are not allowed to invest in other firms or receive investments from other firms. We are addressing the problem with infeasible solutions,” said senior partner at a Big 4 firm, referring to the steps taken by ICAI to create large domestic firms. ICAI claims that it has taken a series of measures to fulfill the mission of the government, including forming a committee for the aggregation of CA firms, issuing revised networking guidelines and guidelines for formation of multi-disciplinary partnership (MDP) firms.
For instance, the institute has formed a committee for aggregation of CA firms. This committee is reviewing the existing guidelines, including advertising and M&As rules, which come in the way of local CA firms in achieving scale. Currently, the ICAI’s code of ethics don’t allow CA firms to advertise their services. The CA firms cannot even solicit businesses from potential customers, as per the rules.
Experts said the despite rolling out revised networking guidelines in 2021, ICAI has not received much response from the CA firms. “Since the revised networking guidelines have come into force, less than 200 firms have registered with the ICAI. This suggests that these guidelines have not served their intended purpose of enabling the small firms to grow,” said partner at a mid-sized Indian firm.
In March, ICAI president Ranjeet Kumar Agarwal said that of about 100,000 Indian CA outfits practising in the country, some 75,000 are proprietorship firms while the remaining 25,000 Cas are partnership firms. Just about 400 domestic firms have 10 or more partners.
“In the audit profession, the scale is important. The Big 4 are significant in terms of their presence and people. Size has its own advantages such as access to resources, international network, technology and experiences. This is a challenge for all the homegrown CA firms,” said partner at a Indian CA firm.
Experts said the current regulations are not conducive for the domestic firms to grow. For instance, over 100 domestic audit firms have international affiliations but they are not able to utilise them for soliciting work or for branding – both of which are prohibited under the CA Act 1949. “The ICAI is interested in keeping the firms at small or mid-level. Due to insufficient investments in technology, Indian firms have not been good with the documentation process, which is also a big drawback,” said a partner of Big 4 quoted above.
Indian CA firms said that Big 4 firms have been lobbying hard to keep their business intact. For instance, when RBI had mandated joint audit of banks and NBFCs above a certain threshold, it resulted in the transfer of business from larger firms to smaller firms. “There was push back from some “powerful sections” of the industry against this norm,” said a partner. For the record, the Big 4 firms include Deloitte, EY, KPMG, and PwC.
Experts said that the competition is extremely high among the non-Big 4 firms which results in fewer domestic firms gaining size. “Within the listed companies, there are two types are companies – those who prefer only the Big 4 and those who don’t. Beyond the Big 4, there are over 1 lakh firms who are competing with each other for audit business. The competition is very high in the non-Big 4 space,” said partner at an India firm.
[The Financial Express]
