Smaller Accountancy Firms Want India to Implement UK Regulator Report on Big 4

A report by UK’s competition watchdog calling for operationally splitting up the big four accountancy firms — Deloitte, PwC, EY and KPMG — could lead to some action in India too, industry trackers say.

Smaller accountancy firms in the country want Indian regulators to implement the radical proposals, such as operationally splitting the Big Four’s audit and non-audit businesses and mandatory joint audits, put forth in Competitions and Markets Authority’s report, the sources said.

Market regulators across the globe have been keenly anticipating the CMA report because it examined globally relevant contentious issues such as the oligopolistic structure of the audit market and inherent conflict of interest amongst audit and non-audit businesses of the firms.

In India, too, the Big Four firms are in the spotlight after corporate failures like IL&FS and Jet Airways.

The CMA report called for a separate management, CEO and board for the audit practice, besides a separate bonus and compensation structure.

It also suggested mandatory joint audits with non-Big Four firms because the current structure of the industry heavily favoured Big Four firms and restricted choice.

The report also highlighted a need for more robust regulatory oversight of the audit committees to make them more accountable. Over the years, the audit market has consolidated from Big Eight firms to Big Four and experts feel that the market structure limits choice and is not resilient.

Implementing the Competitions and Markets Authority’s proposals will help increase choice in the market, end the Big Four oligopoly, and fix other longstanding problems, their smaller rivals said.

“Indian regulators can start joint audits with Nifty 50 and then extend based on their experience,” said Vishesh Chandiok, CEO at Grant Thornton India. “The report recommendations present an immensely progressive view of how to finally address the ‘demand side’ problems in the large audit market that will spread from the UK to other major markets and address this issue of auditor choice once and for all. It’s definitely the end of this long standing oligopoly and finally moving towards a free and transparent market,” he said.

All solutions proposed for these issues until now had stopped short of addressing how to create demand for challenger firms outside the big firms and little was done to focus on audit quality, top executives in smaller firms said. They believe supply side barriers on capability and capacity are not difficult to build if there was demand.

Non-Big Four accounting firms in India have seen their market share erode over the last two decades due to dominance of the big firms.

Experts said deeper reforms such as mandating joint audits are needed to fix quality issues. “If joint audit is being introduced, this would redefine the way audits would be delivered by audit firms,” said Milind Kothari, CEO at BDO India.

Source – TheEconomicTimes