Vishesh C. Chandiok, CEO of Grant Thornton India, said in an interview on Wednesday that the situation throws up imminent opportunities and threats for audits in India. Edited excerpts:
The audit industry in India is going through one of its worst phases where two of the Big 4 auditors are facing flak for negligence in the IL&FS case. What are your thoughts?
We have gone from a phase in India where no one used to care what an auditor said or did to one where every move by an auditor is being examined under a magnifying glass. I would rather that people care about audit than not, even though the scrutiny may be difficult or even unreasonable at times.
What sort of an impact do you think will these developments have on the industry?
I think the audit profession has a unique opportunity and some imminent threats. There is a huge opportunity for auditors to step up and provide the assurance investors and capital markets are looking for in these times of enhanced uncertainty because of shortened business life cycles and sometimes poor governance.
New standards like KAM or the need to explain Key Audit Matters in audit reports from this year provide the ability to have this conversation with the community.
Do the second set of auditors after the Big 4 have capacity to fill up the gap if the Big 4 auditors get barred?
I’m not sure who is ‘Big 4’ and who is “second set" in India. I know Walker Chandiok, our Grant Thornton India affiliate, is significantly bigger than some of the so-called Big 4 firms already.
There is no issue with capacity to fill up the gap of any number of firms not being available for whatever reason. If there is demand, firms will produce the supply. We ought to stop being “Big 4" obsessed and realize audit quality is not the purview of only the big firms. There are at least 20 quality Indian firms who are waiting for the opportunity.
Do you think ban is a solution?
Only in extreme cases is the “nuclear option" of banning an audit firm desirable and appropriate—when it is beyond reasonable doubt that the audit firm colluded with the management in intentionally defrauding, and this extended beyond the audit team to the audit firm’s leadership and management. There are many intermediate actions that are necessary and ought to be taken more often—fine up to 10x audit fees as provided under our Companies Act, inability to accept new clients for a period, mandatory joint audit for a period, direct and more active oversight of the regulator on the firms’ quality control, etc. Overseas regulators have used these actions in the US, Japan and Korea in similar situations.
What sort of introspection should auditors do now?
The business and legal environment has fundamentally shifted in the last few years from predominance of legal form to a combination of legal form and substance. That is a very high standard, and auditors need to evaluate their clients’approach and attitude to business generally and to financial reporting in particular, and whether they can continue to provide assurance on these clients’ financial reporting. Auditors need to understand that when they get it wrong, it is society as a whole that suffers - people lose their life’s savings, their pensions, their retirement fund, their investments - and that is a huge responsibility that one ought to take more seriously than what one may have in the past.
Where is the Indian audit industry lacking or facing challenges in making fair audits?
It is difficult to generalise for an industry that has over 60,000 firms and over 1,000 audit firms that audit public interest entities. The NFRA (National Financial Reporting Authority), the new independent regulator, and ICAI (Institute of Chartered Accountants of India), the old regulator, need to set aside their differences and work together to take all steps necessary to enhance audit quality. The Committee of Experts appointed by the MCA (Ministry of Corporate Affairs) as requested by the H’ble Supreme Court had made significant and far-reaching recommendations that in my opinion would address many of the concerns, but we seem to be questioning the same versus focusing on its quick implementation.
What other major change that the auditors in India need to do, what are you changing?
PM Modi challenged Indian firms to step up and create the next Big 4 out of India. We believe we have stepped up to that challenge with nearly 5,000 people and India offices in Washington, London, Tokyo, Singapore besides 20 locations in India. Whilst the regulations permit providing significant tax, advisory, consulting, diligence and technology services to audit clients, we believe users of our reports (Audit Committees, Investors, Regulators, Investors) consider auditors’ objectivity threatened when we do anything other than audit. We hope to help rebuild trust and confidence in audit through this.
What sort of work force addition will need to be done to absorb the work which will come to other auditors if the Gig 4 do get barred?
If any firm gets banned, most of its audit staff will redistribute to other firms. We add around 500 people to audit each year in India, and I would estimate a similar additional number for each big firm that stops participating in the market. However, I do reiterate that banning any firm is not something I support other than in exceptional circumstances and the odd instance.
The debate of domestic v/s foreign auditor, how do you look at it?
I think this debate has been decisively settled by the MCA committee of experts as referenced earlier. All top 100 firms in India have some sort of foreign auditor affiliation and we ought to encourage this if we want to help Indian companies become global forces to reckon with. If we want to become the global powerhouse with a $10 trillion economy, we also need to develop our own institutions to support high-quality financial reporting instead of relying on Western models alone.
Do the domestic auditors have capacity to absorb the work of MNCs?
Many MNC (multinational companies) subsidiaries rotated outside the Big 4 post mandatory firm rotation. GE, Honda, Pepsi, Pfizer and Volkswagen are names I am familiar with. As I said earlier, demand for audit from Indian firms will help them create the supply, and there is no shortage of talent in India, which is the second largest market for accounting professionals in the world (after the US). China, Japan and France are all great examples of big and comparable economies to India where strong domestic audit firms dominate the market ahead of the Big 4, and we ought to learn from those countries’ audit regulations.