INDIA INC GETS READY FOR MANDATORY AUDIT ROTATION; FIGHT BETWEEN BIG FOUR FIRMS
20 September 2016
According to a study by PRIME Database, audit related changes were made in 152 listed companies (out of 1,520 NSE-listed companies) from FY16 to FY17.
Section 139(2) of the new Companies Act, 2013 says all public and designated private companies, with a few exceptions, will have to mandatorily change their audit firms after two terms of 5 years each. The auditors have to be given a break of 5 years after two consecutive tenures.
The audit committees, CFOs and, in a lot of cases, promoters are now meeting accounting firms to find the best fit.
"Clients are clearly opting for quality and depth of services. They want to partner with firms that deliver seamless services across geographies," says Milind S Kothari, managing partner, BDO. The evaluation process is rigorous. "Evaluation process is rigorous. Companies want to know about the partner, the team, sector credentials of the firm, the audit approach and how we will use technology on the audit," says Sudhir Soni, national leader (Assurance) of SR Batliboi.
One of the key issues that a set of large companies are dealing with are the conflict norms of auditing firms, especially the Big Four. With their current auditor ruled out, another Big Four firm doing internal audit work, and a third firm consulting with the same company; they are left with the choice of just remaining one large firm or either having to choose among a Grant Thornton or a BDO or an Indian firm.
The big fight is being fought between the Big Four firms that have the cream of the large company audits. The big boy of Indian auditing market, Deloitte is fighting aggressively to replace the marque clients that will be rotating out, and market experts say , a slug out is been seen between EY and KPMG for the Deloitte clients. And the PWC audit team, led by the industry leader, Russell Parera is bringing in formidable competition in the beauty parades, winning the NSE account recently .
The Indian auditing firms that have continued to work with a lot of large Indian companies are finding it tough to compete in this market. "The early trends clearly indicate a shift towards the large multinational audit firms," says Pranav Haldea of Prime Database.
Some of the major companies that changed auditors in the last few months include, Indusind Bank, Cipla, Biocon, L&T, Cummins, Vedanta, Dr Reddy's amongst others.
Also, some of the companies have taken a middle path, and opted for joint audit for at least a year, before they replace the old auditor. Like Redington (India), which was audited by Deloitte (Deloitte Haskins & Sells), has opted a joint audit and also roped in EY. For a year now, both Deloitte and EY would audit the company. Also, L&T that was audited by the Sharp & Tannan would be jointly audited by the firm, along with Deloitte (Deloitte Haskins & Sells).
As the battle hots up among the auditing firms, a price war is unfolding in the market place as the big players sacrifice profitability to get marquee names for strategic reasons. "Companies will exploit the competitive intensity in the market. They are asking for better price for same services from a similar quality firm, and in some cases, a better brand for same money," says the audit partner of a Big Four.