Price Waterhouse' Rs 600 crore audit revenue may take a hit, could lose big clients too

The Economic Times |
Milind Kothari , Managing Partner
Head
Tax and Regulatory Services
|

12 January 2018

PwC's audit revenues amount to Rs 600 crore, of which 40% is from audit fees from listed companies.
 

MUMBAI: Price Waterhouse faces the prospect of a multi-crore revenue hit, and rising employee and client attrition a day after the Securities and Exchange Board of India (Sebi) took the unprecedented step of banning the firm from auditing listed companies for two years.

The firm employs about 2,500 in its audit practice, of which about 70 are partners. The immediate impact would be losing clients such as HindalcoBSE 0.69 %, Tata SteelBSE 0.12 %, Ashok Leyland, IDFC, Sterlite and  Tata TeleservicesBSE 4.91 %, unless the Securities Appellate Tribunal (SAT) offers some relief to the firm. PW plans to appeal the Sebi order and could move SAT in the next few days.

On Thursday morning, PW chairman Shyamal Mukherjee told clients that the firm is hopeful of a positive verdict in response to its appeal. "The order also does not apply to any of our other businesses — be it advisory, tax, risk assurance or audit of unlisted companies. PW audit firms will be appealing this decision and believe that there are strong grounds to get a positive outcome," Mukherjee wrote in an email to clients.

PW, which was represented by law firm J Sagar Associates, is consulting leading securities lawyer Somasekhar Sundaresan. Mukherjee held a tele-conference with senior partners and directors on Thursday to allay fears and sought to convey the message that the firm is on strong footing and ready to fight the case.
Over the past few years, the firm has sought opinion from various legal luminaries and the consistent message they have received is that though the firm can be penalised, it can't be banned.
 
Insiders said the company expected a fine and had even provisioned for it, but the ban plus fine — Rs 13.09 crore with 12% interest per annum payable since January 2009 — was a bolt from the blue.
A major challenge for PW will be to hold on to audit clients who don't want to deal with uncertainty, and make sure clients from other service lines don't start deserting it fearing reputational risk. At least in two known cases, companies have informed PwC they won't be working with the firm in future.

"The Satyam incident was in January 2009. Over the years, PW audit firms in India have made huge investments in tool, training and infrastructure, and are today recognised for high-quality, stringent audits," Mukherjee wrote in his email. PW's total India revenues stood at about Rs 3,200 crore for 2017

PwC's audit revenues amount to Rs 600 crore, of which 40% is from audit fees from listed companies.

While it had 75 listed clients, the firm's most lucrative clients are unlisted MNC blue chip companies. Some PW insiders and external experts feel the Sebi order may not be a body blow to the firm. There could be some layoffs in the audit business, but a firm like PwC can easily absorb employees in other service lines, said one of the firm's senior partners.
 
Competitors Too Flayed Decision

Many competitors were also critical of the decision.

"The Sebi order comes nine years after the Satyam scam and it could be too late in the day for punishment. Also, the question is, who is being punished here? PwC, its current employees or the companies that the firm is auditing — as the Sebi order is going to impact everyone else," said Milind Kothari, India head, BDO.

"If a doctor kills a person during surgery, does it mean the hospital has to be shut down? This order has implications not just for PwC but the entire profession," said the CEO of a competing firm.

Partners within the firm feel Sebi has been unduly harsh. "What is disappointing about the Sebi order is that they have not acknowledged where we have come today in terms of quality. We were punished for two individuals' mistakes in 2009. Since then, we have been doing quality work for top Indian companies. There have been no problems, we have passed peer reviews regularly. Globally, regulators punish firms and check for remedial actions," the person said, requesting anonymity.