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Big 4's dominance: Local companies call for level playing field

Mumbai, May 6, 2024

Indian auditing firms are pushing for fair competition with multinational counterparts, expressing concerns over the Big Four's increasing dominance and alleged manipulation of regulatory loopholes. The Institute of Chartered Accountants of India (ICAI) recently investigated affiliates of EY, Deloitte, PwC, and KPMG, where the firms were able to obtain court stays against disciplinary actions by the ICAI disciplinary committee after years of scrutiny, according to local rivals.

Indian auditing firms are seeking a ‘level-playing field’ with multinational counterparts, concerned about the Big Four’s growing dominance and alleged manoeuvring of regulatory grey areas as allegedly demonstrated by their success in managing or delaying disciplinary actions.

In recent Institute of Chartered Accountants of India (ICAI) investigations into the affiliates of multinational professional services firms EY, Deloitte, PwC, and KPMG, the firms have managed to get court stays against disciplinary proceedings by ICAI’s disciplinary committee after years of investigation, their domestic rivals said.

In a case against EY affiliate firms SV Ghatalia and SR Batlboi, which began in 2013, the ICAI disciplinary committee issued an order on April 26 that barred and fined the two partners and directed them to sever all associations with the global entity, EY Global. The partners in question had retired a few years prior.

The firms subsequently obtained a stay order from the Delhi High Court (HC) against the actions of the disciplinary committee.

“At the point the investigation was started, the disciplinary committee was absolutely right in calling out professional misconduct in their order against a multinational firm,” said Amarjit Chopra, former president of ICAI. “All multinational audit firms (MAFs) broke the rules then. Later, they might have separated audit and consulting firms, but not then. They were in clear violation of ICAI regulations when investigations started,” he said.

According to domestic audit firms, multinational audit firms have previously skirted around ICAI regulations that prohibit advertisements, payments for referral fees to global entities, utilisation of global resources, sharing any form of profit or fee with global entities, and maintaining control from outside India.

MAFs say they are local firms controlled by Indian partners, and the fee they pay to global entities is for technology, maintenance, etc.

However, when ICAI asked for a breakdown of the costs, the Big Four firms refused to share the information. Local firms claim that “restrictive covenants” imposed by private equity, lenders, and investment banks favouring the use of big six firms, along with global connections and government tender requirements regarding scale, experience, and capital, effectively exclude domestic players from many assignments.

They feel it's high time the government came out with regulations that provide a level-playing field for all players. Big six includes Grant Thornton and BDO.

“Justice delayed is justice denied,” said Raghu Aiyar, CEO and senior partner of KS Aiyar, the country’s oldest audit firm.

Experts claim that the Big Four firms entered India through the RBI route in the early 1990s and never sought permission from ICAI to operate in the country.

Paras Savla, partner with boutique tax and audit firm KPB & Associates, said a balanced professional environment hinges on creating a level playing field for small and medium practitioners (SMPs).

“SMPs, which are often constrained by limited resources and influence compared to larger firms, face hurdles to growth and competition,” he said. “Effective policies and measures should promote competitive neutrality, ensuring all firms, regardless of size, have equal access to resources and markets.”

In the last two decades, the big six have pushed smaller firms out of audit assignments. Affiliate firms of the top six professional services firms oversaw 323 assignments out of 483 Nifty-500 companies as of March 31, 2024, and they secured 637 assignments out of 1,961 on the NSE main board, as per data.

Chopra said all the big scams, like IL&FS, Satyam, and Global Trust Bank, had a Big Four auditor. “I say it again and again: the Indian firms are as good as any of these firms. We just have to get the right opportunities,” he said. “The government has played a dubious role in this matter. They have been immune to the needs of the smaller firms.”

ICAI, on its part, said it is taking action against multinational audit firms after the issue was also dealt with by the Supreme Court in its judgement dated February 23, 2018 in S Sukumar vs ICAI case. In a statement, the institute affirmed its commitment to carry out its regulatory functions in line with legal due process and the guidance of the Supreme Court.

The corporate affairs ministry (MCA) recently nominated retired Justice Suresh Kumar Gupta (chairperson), Rakesh Mohan, and Sandip Garg, along with Pankaj Tyagee and Anil Bhandari of ICAI, to an appellate tribunal to hear cases against ICAI disciplinary committee actions.

However, the institute has been dragging its heels in this matter.

ICAI, which was set up by an Act of Parliament and regulates the profession in India, in its various reports—Study Group of ICAI 2003 & Report on Operations of MAFs in India in 2011—has said multinational firms are violative of the Chartered Accountant Act, 1949, but hasn’t taken any action against the firms till now.

While government reports have said MAFs are not breaking any laws, in 2016, an MCA report led by Ashok Chawla said multinational network accounting firms (MNAFs) are distinct from MAFs due to Indian nationals’ control and management, despite global network affiliation.

Subsequently, in 2018, the MCA, in compliance with a Supreme Court order, established an expert group (‘COE’), which concurred with and endorsed Chawla's group's conclusions after an independent review.

In July 2017, Prime Minister Narendra Modi stated in an address that there was a need to create four major Indian auditing firms that could rank among the world’s Big 8. Seven years later, no Indian company has yet posed a significant challenge to the dominance of the Big Six firms in India, let alone on a global scale.

[The Economic Times]

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