New Delhi: An expert committee formed to examine issues regarding audit firms, including restrictive terms for entry of domestic audit firms, will miss its 30 November deadline to submit its report.
Committee chairperson Ashok Chawla said the report is likely to come after another month, around 30 December.
Audit firms other than the so-called Big Four global accounting firms—KPMG, Pricewaterhouse Coopers, Ernst & Young (EY) and Deloitte—had approached the government to raise their concerns about the adverse impact on their business due to structuring of certain firms, leading to evasion of various regulations and imposition of restrictive conditions for appointment of auditors.
“Restrictive covenants shouldn’t be there because they become restrictive trade practices and it’s anti-competition. Secondly, it promotes the Big Four (audit firms),” said Bharat Dhawan, managing director of Mazars India, the Indian arm of the French audit firm.
On 30 September, the government constituted an expert group to look into issues related to audit firms and submit a report within two months, giving its recommendations. The three-member committee also comprised Jubilant Bhartia group founder Hari S. Bhartia and Reserve Bank of India deputy governor N.S. Vishwanathan.
The expert group was required to look into six main questions which related to restrictive shareholder agreements, possible negative impact on the market owing to audit rotation and restrictive terms imposed by foreign investors for appointing auditors.
The committee will examine the possibility of introducing joint audit in cases where there are restrictive shareholder agreements and in other instances where a multinational firm has been appointed as the auditor.
Dhawan argued in favour of joint audit saying that it would help create capacity for Indian companies. “Joint audit will create capacity beyond Big Four and encourage Indian firms to become bigger. Joint audit also promotes quality because of the four eye principle, that is, two auditors will audit a company and each auditor will keep an eye on the other,” he added.
The group was tasked with analysing practices in other emerging market economies regarding domestic audit firms and joint audit and propose measures to promote creation of ‘international-level Indian audit firms’. The expert committee would also outline the legal and regulatory requirements if joint audit needs to be implemented.
“If you have a majority shareholder, a multinational company, which appoints an auditor across the globe being a firm from the same network, that’s not a restrictive covenant but a shareholder choice, which helps in coordination and commonality of approach. That is distinguished from agreements where lenders or private equity investors require a big firm to be appointed as an auditor, those are considered restrictive covenants. The recent EU legislation also prohibits so-called “Big 4 only” contractual clauses entered into between a public interest entity and a third party (e.g., a bank) that restrict their choice of auditor. In our view, the choice of audit firm should rest with shareholders based on recommendation of the audit committee and board of directors,” said Sudhir Soni, partner in an Indian member firm of EY.