The ICAI is the apex body of chartered accountants. Overseas audit entities operate in the country through network firms model.
The corporate affairs ministry's efforts to bolster regulatory framework for audit industry assumes significance against the backdrop of many auditing entities and auditors coming under the regulatory scanner in connection with various corporate misdoings in recent times.
Recently, the ministry came out with a consultation paper covering various aspects related to auditing practices and would be finalising its view after taking into consideration suggestions from stakeholders.
"The entire controversy with respect to Big Four or Big Six is that foreign companies are circumventing our legal provisions and giving audit services here. The controversies have been existing for too long. We have clearly taken a stand before the Supreme Court that there is no such issue at all.
"These are network firms and they are Indian LLPs (Limited Liability Partnerships). The partners are Indian partners, who are members of the ICAI. They are part of global networking arrangements for getting the advantage of quality standards etc...," Srinivas said.
Deloitte, PwC, EY and KPMG are referred to as the Big Four audit firms.
Talking about the current situation in the country, the secretary said small audit firms are dominant in terms of numbers but in terms of business, it is dominated by a few large firms.
"Audit industry's structure is very complex. We will not be able to implement a 'one-size fits all' approach. There has to be some nuanced approach. Otherwise, it may not be equitable. We will look at it. One thing is very clear. The potential of conflict of interest has to be addressed," he emphasised.
When asked about regulating foreign auditing entities like Deloitte and KPMG, Srinivas wanted to know why are they being called foreign entities.
"Why are you calling them foreign entities? That is the point I am making. They are not foreign entities. Whoever is practising audit in India will have to be regulated in India. ICAI has to do it at the individual level... There is no confusion on this issue. I am saying that the consultation paper contains a large number of interventions and we are trying to get the feedback.
"We will very soon try to formulate our approach and then see what can be implemented as it is, what has to be implemented in a phased manner and what may not be very relevant as of now. We will take an approach and then decide on amendments to Act, rules, or regulations," he noted.
The consultation paper has significant recommendations, including possible splitting of large audit firms and joint audits.
"Should there be a joint audit, especially for large listed firms? This is another issue where checks and balances would have to be there. It will cost a little more for companies as they will have to hire two auditors but then there would be greater transparency and reliability.
"Minority investors would be better protected if there is a joint audit," Srinivas said.
According to him, the ministry expects to take a final call on the recommendations in the consultation paper "very soon".
"There are also issues that do we split large audit firms into audit and other than audit functions because it appears that internal firewalls are not sufficient. There would be separate legal entities. The partner who is in the audit side cannot get a share in the non-audit revenues.
"This is the thinking of the UK watchdog on competition, equivalent to our Competition Commission. The CMA (Competition and Market Authority) has articulated that they may want to split the Big Four into separate entities," he noted.
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