Jan 8, 2013

Proposed cap on audits divides community

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The Companies Bill proposal to cap the number of companies that can be audited by a firm at 20 has led to a vertical split in the audit community. While the bigger players want the scope of the provision to be restricted to public companies, the smaller ones are in favour of the cap.

The Bill has been passed in the Lok Sabha and there is a hectic activity in the capital’s power corridors as lobbying picks up ahead of the tabling of the Bill in the Rajya Sabha. The Upper House is likely to take up the Bill for passage in the coming Budget session.

Statutory audit of top-listed companies is dominated by the ‘Big Four’ — KPMG, PricewaterhouseCoopers (PWC), Deloitte and Ernst and Young — and their affiliates. According to informal estimates, these firms enjoy a 55 per cent market share in the audit of listed companies’ business.

No. of companies* 10,66,102
Active companies 7,05,699
Number of CAs required 35,285
No. of members in full-time practice 98,863
Coverage of requirement to availability 2.80 times
Source: MCA, ICAI
*According to MCA annual report 2011-12

One of these entities has even written to government, saying the capping clause will cause confusion as there are not enough qualified auditors to handle the volumes. “They have also been talking to members of Parliament, ministers and are expressing their concerns on this move,” said an official closely associated with the matter, requesting anonymity.

In a recent conference in Delhi on the Companies Bill, PWC partner Harinderjit Singh also expressed his reservations against the move and its potential impact on the quality of audits.

Said N Venkatram, partner at Deloitte Haskins & Sells: “It’s not a Big Four vs Little Four issue. The limited point that is being made is that private limited companies should be excluded from the calculation of 20 companies. The earlier law excluded private limited companies. If you include the private companies, then just putting an arithmetic limit won’t work. Then there should be a financial limit,”

However, auditors running smaller firms say the move will create more opportunities for chartered accountants and help them earn better fees. “Today, I pay Rs 3,000 for audit of my company. Once the supply gets restricted, price curve shifts upwards. It may become Rs 20,000,” said the managing director of a small company, who also did not want to be named.

Another issue pointed out by the Big Four is the fact that several large companies have numerous subsidiaries. For example, if the 20 company rule is applied directly, then a firm may not even be able to cover more than one large company and its subsidiaries.

“Say a company has 400 subsidiaries, why does the same audit firm have to audit all of them. Twenty different small firms can do the audit for subsidiaries and the big firm can consolidate. I don’t see any problem in this,” said the managing director of a boutique consultancy, also on condition of anonymity.

There is enough talent in India to cover the demand several times. The auditors point out the data in the ministry of corporate affairs annual report that there are about 1.06 million companies registered in India. Of these, 705,699 companies were active.

If the 20 company rule is applied, over 35,000 auditors will be required. Supporters of the Bill provisions point out that there are about 98,863 practicing chartered accountants, providing a coverage of 2.8 times to the Bill requirements.

“We are not talking about sole proprietorships. Do we have enough number of firms who can handle large audits? We may not have more than 300 such firms,” Deloitte’s Venkatram said.

Amarjit Chopra, a chartered accountant and former president of the Institute of Chartered Accountants of India, said the changes in company law were in the right direction. “Nowhere in the world there are rules which are against the local practitioners. It’s unfortunate that whenever there is a foreign collaborator, they want one of the Big Four to be the auditor. Such clauses are restrictive.”

Chopra also pointed out that even some public financial institutions had started asking for a Big Four auditor. “How will the local talent grow under such restrictive environment?” he asked.

Added Pavan Kumar Vijay, managing director of Corporate Professionals: “The new Companies Bill provisions provide a golden opportunity for Indian chartered accountants. They have to learn the art of building mega firms with specialists to provide different solutions.”

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