Bulk of large listed businesses prefer big four as auditors

NEW DELHI: Bulk of the large listed companies in India prefer the network firms of the big four professional services firms—Deloitte, KPMG, PwC and EY—for statutory audit from among the more than 2,300 statutory auditors in the country, official data showed, indicating their apparent concentration in the premium segment of the audit market.

On the other hand, close to 70% of all the statutory auditors in the country contend with just one audit client, as per data available from audit regulator National Financial Reporting Authority (NFRA). This indicates that smaller firms find it hard to get a foothold in the upper end of the audit market.

Absence of competition in audit market is a big worry for audit regulators worldwide but executives with large audit firms said large companies prefer them for valid reasons.

“If all large businesses chose from three or four audit firms, then how can auditor rotation be meaningful? As in every industry, competition is vital in the audit world as well,” said a person with knowledge of NFRA’s estimate of the audit industry. The number of big auditors have come down from big eight in the 1980s to big four now due to consolidation in the industry and the failure of one firm and any further consolidation could narrow competition which is not a good idea, the person explained. Emails sent to NFRA, EY, KPMG, Deloitte and PwC seeking comments remained unanswered at the time of publishing.

Under the Companies Act, listed companies, public companies with paid up capital of ₹10 crore and above, private limited companies with paid up capital ₹20 crore and above and all companies with ₹50 crore and above borrowings from public institutions irrespective of their paid-up capital have to mandatorily rotate individual auditors after five years and audit firms after ten years. The cooling off period between two assignments is five years. Audit rotation seeks to enhance integrity of auditing and the quality of reporting besides opening up opportunity to more auditors.

The network firms of the big four audited 522 companies in FY19 representing 75% of the market capitalisation of the 5,023 listed companies for which data is readily available, NFRA data showed. This represents about 10% of the listed companies by number. On the other hand, 1,578 auditors audit only one company each accounting for a small fraction of the listed companies.

However, the silver line is that the situation of audit concentration in India is better than in some other western economies such as UK. Reuters reported in July from London quoting audit watchdog Financial Reporting Council (FRC) that the big four audited all FTSE 100 companies in a roughly even four-way split.

A senior executive in one of the big four firms said that there are different segments in the audit market and some of the large companies do not see value in assigning statutory audit to smaller audit firms for various reasons, which is no different from the trend seen in other markets. Branding is one of those considerations as potential investors pays attention to this. 

“Some of these are multinational companies with presence in several markets and would prefer an audit firm which has the scale and technological capabilities to audit them. But there is no doubt that smaller audit firms need to scale up,” said the executive. Another industry representative said that while a large audit firm may assign five to six partners for auditing one client, some of the smaller audit firms only have about three partners in all. One factor that inhibits the growth of smaller firms is their governance structure which if made more professional, will help in their growth, said the partner.