May 12, 2018

The Institute of Chartered Accountants of India has issued notices to Indian arms of multinational auditing firms including Deloitte, PricewaterhouseCoopers, EY, KPMG, Grant Thornton and BDO, seeking details of corporate structures, investments and revenue.

The body is investigating whether these multinationals, their Indian arms and domestic affiliates are flouting foreign direct investment norms and other guidelines, sources said. A separate set of notices was issued to some Indian firms that are part of foreign networks such as Nexia, Kreston, Mazars, Baker Tilly and RMS.

The Big 4 – which are Deloitte, PwC, EY and KPMG, the four largest accounting firms in the world – got notices asking questions on total revenue, profitability, equity structure and even revenue per partner. ICAI also sought information from firms operating under international brand names, investments made by multinationals over the years and holding structures.

The notices were issued about three months after the Supreme Court asked the government to constitute a committee to look into the functioning of foreign auditing firms in India. The government also plans to set up a separate watchdog for accountants, which may erode some of the ICAI’s powers.

Naveed Gupta, president of ICAI, declined to comment on the issue. Queries emailed to Deloitte, PwC, EY, KPMG, Grant Thornton and BDO did not elicit any response.

At the heart of the matter is the prolonged rivalry between foreign and domestic audit firms, which intensified during the mandated audit rotation in 2017 and 2018. Domestic firms that audited some of the biggest Indian companies lost out to multinationals during audit rotation. Domestic firms claim they are at a disadvantage against the might of the multinationals. On the other hand, the multinationals claim that local firms don’t have the bandwidth to tackle the complicated audits of large companies.

Foreign firms are not allowed to take auditing work in India directly. They typically have an affiliate firm for such purposes, which, domestic players alleges, is part of the foreign firm for all practical purposes. “While domestic arms of foreign audit firms have different names, this is merely hogwash. The auditing arm operates from the same premises and often partners in auditing practice have two visiting cards,” said the promoter of a domestic firm.

Foreign firms claim their domestic rivals have already missed the bus. “They (domestic firms) were happy auditing large companies and did not pay competitive salaries or invest in technology. When mandatory audit rotation came, they were least prepared to compete with bigger firms that have been investing in people and technology. 90% of our workforce is Indian, entire leadership of Big 4 firms in India is Indian, the entire equity in firms is held by Indian partners – so what’s the problem?” asked a senior partner with a foreign firm.

The Big 4 employ the largest number of CAs in India and between them have a combined workforce of more than 160,000. Most multinational firms maintain they abide by domestic regulations.

The government’s proposed National Financial Reporting Authority would overlook and penalise CAs, a move some say would cut the Institute of Chartered Accountants down to size after not apparently being able to rein in CAs. According to some, ICAI members deliberately take an anti-Big 4 stance during internal elections to secure votes from a majority of the members.

[The Economic Times]