Big Four runs for cover: IL&FS effect may dim the halo around the auditors

The criminal charges pressed against signing auditors, along with junior professionals involved in the audit process, have unnerved many in the fraternity
It will be an apprehensive Friday for the Big Four multinational audit networks. The National Company Law Tribunal is taking up for hearing the Ministry of Corporate Affairs’ petition to ban the two auditors of Infrastructure Leasing & Financial Services (IL&FS) Financial Services, Deloitte Haskins and Sells, and BSR and Associates (a KPMG affiliate) for allegedly colluding with the management in dubious lending practices.

On the same day, the Securities Appellate Tribunal is expected to give its final order on the market regulator’s ban of Satyam auditor Price Waterhouse. A January 2018 Securities and Exchange Board of India order had barred PwC network entities from auditing any listed company for two years, following a financial fraud at Satyam Computers in 2009.

Earlier this month, the Reserve Bank of India had barred SR Batliboi & Co. from auditing commercial banks for a year. This follows huge divergences in non-performing assets in a private bank that the EY member firm audited.

The stringent pushback by regulators and investigating agencies against audit firms, following the crisis in the IL&FS group, has thrown the auditor fraternity in the Big Four audit networks into a tizzy.

“Any ban on errant auditors should be a measure of the last resort. Anything of this scale has not been carried out in any other country. I am not sure whether this will help to improve the quality of audits in anyway,” said an auditor from one of the Big Four network firms.

The criminal charges pressed against signing auditors, along with junior professionals involved in the audit process, have unnerved many in the fraternity.

A senior auditor from one of the Big Four audit network firms with over two decades of experience  — who still had seven years to go before her retirement — recently decided to quit the profession. “The risks involved are just too big,” said the person, who did not wish to be named. Another auditor from another Big Four firm said he is not sure if he would want his children to join the audit profession.

For the Big Four network firms restrictions on offering audit services will have a cascading effect on their India business. Between them, the Big Four networks have on their rolls anywhere between 12,000-15,000 auditors. They also are the statutory auditors for over 300 of the BSE500 companies (non-public sector enterprises).  Corporate India is also keeping close tabs on the developments in the audit industry. Any ban on auditors will mean companies will have to scurry to appoint new ones.  

“Where will we get auditors with competence?” asked Nawshir Mirza, an independent director on the board of several blue-chip companies. He is not sure if the second and third rung of auditors — mostly medium- and small-sized ones — has the scale and technical prowess to take up complex audit assignments of large Indian conglomerates. Auditors say their multinational clients in India are not sure how it will pan out for them. Almost all multinational companies prefer to have the same auditor across group companies in various countries.

Auditors in Big Four network firms say they are likely to take a conservative and cautious approach. This may involve shedding some ‘risky’ clients. “We will be more selective while taking on audit clients,” says the head of assurance service of one of the Big Four audit network firms.

Auditors expect there will be a lot more qualifications in their statutory reports. With regulators asking for a more thorough scrutiny of audited accounts, a closer watch on end-use of funds and debt servicing abilities of companies, auditors say this will change the risk-reward equation. “Over time, audit fees are likely to go up,” says another auditor. Another concern among the fraternity is that given the high risks associated with practice, there could be a talent crunch.

The IL&FS effect will surely dim the halo around the Big Four, says the head of a rival firm. “Big Four is just a tag. The market has space for six to seven large audit firms in India,” he adds.