Eligibility standards may be prescribed: Govt mulls size threshold for auditors of large firms
April 26, 2023
Investors wary of audits by tiny, unknown firms
The government is examining whether to reserve auditing of large companies and public interest entities to audit firms of certain size, repute and technological prowess. Discussions in this regard, though at an early stage, are revolving around a graded approach to addressing the issue of inadequate audit standards putting investor interests at risk, official sources said.
Among the options being weighed are prescribing eligibility standards for audit firms, which oversee financial accounts of large listed companies, through means like a threshold size.
In recent months, several instances have cropped up where companies with large public floats get their accounts audited by tiny, unknown audit firms, causing apprehensions among investors about the quality of their reports. The most prominent instance is the Hindenberg Research report revelation that independent auditor for Adani Enterprises and Adani Total Gas, “hardly seems capable of complex audit work”.
The sources insisted that the matter is still at a nascent stage and would require more discussions.
“The issue is being looked into, given recent concerns on the (small) size of some audit firms and their capacity to take up huge audits. But it also needs to be kept in mind that smaller auditors continue to be at a disadvantage compared to the Big Four firms,” said a source privy to the development, adding that most large companies continue to use the services of the network firms of the Big Four —KPMG, Deloitte, EY and PwC.
More deliberations will also be needed before a final decision can be taken and it will have to be a balancing act, the source further said, adding that the interests of smaller auditing firms also need to be borne in mind.
The Hindenberg report noted that the independent auditor for the two Adani firms is a tiny firm called Shah Dhandharia, which seems to have no current website. Further, historical archives of its website show that it had only four partners and 11 employees. Similar issues had also cropped up when financial irregularities around the erstwhile Punjab and Maharashtra Cooperative Bank (PMC Bank) had been unearthed and questions were raised around its auditors.
Aniket Talati, president, Institute of Chartered Accountants of India, had, however, said that the audit quality is of paramount importance and not the size of the firm. “At the institute, I believe quality is of paramount importance and it is audit quality, which is extremely important. To have a perception that only large or larger firms are better I think it will not do justice to any profession, not just chartered accountancy,” he had told reporters recently.
Ameet Patel, partner, Manohar Chowdhary & Associates, also noted that to say that size is the only criteria for a quality audit is not correct as is clear from the number of instances where large firms have been hauled up for audit failures.
“The way reporting requirements are increasing, it will be necessary for firms to not only increase their own size but also focus on training, updating their knowledge and understanding of changes in the laws and use sophisticated audit tools to live up to the expectations of stakeholders, and do a fair and good quality audit,” he said, adding that smaller auditors can become a larger firm by either adding people to the team or by consolidating with other firms. Given the shortage of talent and huge salaries offered by the Big Four, consolidation would be a better option to survive and thrive, he further said.
The government’s latest move comes at a time auditors of 1,000 large listed companies in India will have to file transparency reports with the National Financial Reporting Authority (NFRA) in specified format from the current financial year. The new regulations are expected to improve the credibility of auditors and boost investor confidence in them. Audited entities and their shareholders will get to know about the management, ownership structure and governance of audit firms and their internal policy frameworks.
[The Financial Express]
