Price Waterhouse, an affiliate of one of the Big Four accounting firms, on Thursday said it will no longer provide non-audit services to companies it audits in India, a week after the government floated a discussion paper to end the practice.
The decision, which will lead to sacrificing a big chunk of tax consulting and business advisory fees, will apply to audit clients governed by the National Financial Reporting Authority, Price Waterhouse Network of Firms in India (PW India) said. The PW India network houses 10 firms, including Price Waterhouse, Price Waterhouse Coopers, Dalal and Shah, and Lovelock and Lewes.
“Given the important role that auditing plays in the Indian economy, everyone that relies on audit needs to have the same high level of confidence in the auditor’s independence, objectivity and effectiveness. Today’s announcement is a demonstration of our commitment to invest in audit quality with a view to continually improve and strengthen it, along with auditor independence," Subramanian Vivek, partner at Price Waterhouse, said in a statement.
The audit fees that auditors earn from clients are quite small, in comparison to non-audit fees. However, a company auditor providing parallel advice on corporate finance can lead to conflicts of interest.
“The consultancy business is at least three times (bigger) a revenue stream as compared to pure audits. This has, in fact, led to auditors not caring about issues such as conflict," a government official said on condition of anonymity.
According to PW India, this voluntary action will further strengthen the audit profession in India and enhance trust in the Indian capital markets, society and the Indian economy at large.
According to R. Narayanaswamy, a professor of finance and accounting at the Indian Institute of Management, Bangalore, such voluntary steps are not enough.
“PW India has announced that it will not provide non-audit services to their audit clients. While this is welcome, voluntary announcements like these are no substitute for a clear legal provision banning non-audit services," he said. “There should be a blanket prohibition on auditors from providing non-audit services to their audit clients. Listing specific services to be banned leads to gaming the law using creative and outlandish interpretations by auditors."
In a discussion paper floated on 7 February, the ministry of corporate affairs proposed five issues which, according to it, hinder the independence of auditors. These include providing non-audit services, fees charged by auditors, lax quality review procedures within firms, personal relationships with clients, non-rotation of audit partners and appointment of auditors being done by the companies. The paper suggested that such appointments be done by external authorities such as the Comptroller Auditor General.
The paper followed increased scrutiny on auditors following alleged lapses in auditing. The most egregious case is that of Infrastructure Leasing and Financial Services Ltd (IL&FS), where auditors are facing multiple investigations for lapses in the audit process. The default in payment obligations by IL&FS left a ₹99,354 crore hole in the financial system, which is the amount IL&FS and its subsidiaries owe their lenders.
Last year, accounting firm Grant Thornton said it would not take up non-audit work such as consulting and transaction advisory from listed companies it audits.
PW India’s decision is expected to prompt the other three big firms—EY India, KPMG, Deloitte India—to follow suit. Mint reached out to all these firms, but they declined to comment.
A senior official with one of the Big Four auditors said on condition of anonymity that they are still examining the discussion paper for its viability. “We are all for reducing conflict. But in some instances when we offer audit services to highly technical clients, say, the information technology sector, having an expert, who has provided consultancy on this sector, is helpful," said the official.
According to data compiled by NSE Infobase, in 2019-20, as many as 903 audit firms audited 1,813 listed companies. There are only 15 audit firms which audit 10 or more listed companies.