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Domestic audit firms get a leg up with FDI policy getting tweaked to allow joint audits
Speaking at the Foundation Day of the Institute of Chartered Accountants in India (ICAI), Prime Minister Narendra Modi got desi auditors dreaming of good times when he added that "By 2022, let us have a Big 8, where four firms are Indian."
Domestic audit firms get a leg up with FDI policy getting tweaked to allow joint audits

Back in July last year, Prime Minister Narendra Modi had said "People talk of the Big 4 accounting firms. Sadly, there is no Indian firm there." Speaking at the Foundation Day of the Institute of Chartered Accountants in India (ICAI), he got desi auditors dreaming of good times when he added that "By 2022, let us have a Big 8, where four firms are Indian."

The latest amendment to Foreign Direct Investment (FDI) policy is a step in that direction. "It has been decided to provide in the FDI policy that wherever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network," reads the new clause. In other words, joint audits are now mandatory for Indian companies that receive foreign investments if an international investor insists on audit by a global firm, or its Indian affiliate.

This opens up a window of opportunity for Indian audit firms, who had blamed the auditor rotation clause in the new Companies Act 2013 for the decline in their market share in recent years. As of last year, there were reportedly only 12 large Indian audit firms left in the country.

According to a Times of India report, this marks a major shift in India's FDI regime. The government's prior silence on the topic had resulted in a situation where the shareholders' agreement between a foreign investor and its Indian partner contained a clause specifying audit by Big Four firms such as KPMG, Ernst & Young, Deloitte or PricewaterhouseCoopers or Indian firms that are part of their network.

The new clause hopes to stall this practice on the basis that a major global auditor is unlikely to approach a rival multinational player for joint audits. This will give Indian firms a chance to step in and, if they prove themselves, they might even grab a lion's share of the pie eventually. Currently, the Big Four control a majority of the audit work in listed entities as well as large Indian companies.

"This is a welcome move that will aid and protect Indian firms. In fact, both sides will benefit," G. Ramaswamy, former President of CA Institute, told The Hindu Business Line. "This presents an opportunity for domestic audit firms to interact with bigger global firms to share their knowledge and compete on a global scale. It will also be an opportunity for foreign auditor to better understand Indian environment and business processes," he added.

Joint audits have long been a demand of Indian chartered accountants. In September 2016, the government had set up a panel following representation from several domestic audit companies. The latter had complained about various practices-including restrictive shareholder agreements-that led to circumvention of regulations by the major players in the business, which in turn had a negative impact on them. Ironically, the report submitted by the expert panel-headed by former Finance Secretary Ashok Chawla-last year had rejected the proposal of joint audits as it was seen to be adding to costs.

In fact, the practice, already prevalent in the country-in the banking sector for example-has not necessarily ensured better quality at the same cost. Perhaps, Indian audit firms will set a new benchmark.

The recent two-year Sebi ban on Price Waterhouse (PwC) network firms, which audits 75 listed companies in the country, could be the icing on the cake for Indian audit firms. PwC has challenged the ban but if it stands, then all its new clients, who came on board last year due to the mandatory auditor rotation clause, will have to look for new auditors. Since they can't go back to their previous auditors, their options are limited to one of two remaining Big Four firms-one that does not do advisory work for the company or any internal audits-or an Indian firm.

With PTI inputs

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