The Indian government’s aspiration to develop a homegrown audit firm that could rival the Big 4—Deloitte, EY, KPMG, and PwC—has recently gained momentum. Finance Minister Nirmala Sitharaman’s recent call for the Institute of Chartered Accountants of India (ICAI) to spearhead the creation of such a firm has reignited discussions within the auditing industry. Despite this ambition, there is significant skepticism among industry professionals, particularly within the Big 4 and mid-sized Indian firms, regarding the feasibility of this goal.
The Challenges in Building a Large-Scale Audit Firm
Creating a Big 4-like firm in India solely based on audit services presents considerable challenges. Indian Chartered Accountant (CA) firms face strict regulations that restrict their growth. Currently, these firms are prohibited from investing in other firms or receiving external investments, which limits their ability to scale. A senior partner at a Big 4 firm highlighted that the current measures taken by ICAI, such as forming committees and issuing revised networking guidelines, are insufficient to address the core issues that hinder the growth of domestic firms.
ICAI has established a committee to review existing guidelines, including those related to mergers and acquisitions (M&As) and advertising. The current code of ethics for CA firms does not allow them to advertise their services or solicit business from potential clients, which stifles growth and visibility. Despite the introduction of revised networking guidelines in 2021, the response from CA firms has been underwhelming, with fewer than 200 firms registering with ICAI. This lukewarm response suggests that the guidelines have not effectively addressed the challenges faced by smaller firms seeking to grow.
The Importance of Scale in the Audit Profession
In the audit profession, scale plays a critical role. The Big 4 firms have a significant advantage due to their size, which grants them access to extensive resources, international networks, advanced technology, and a wealth of experience. These factors create a formidable challenge for homegrown CA firms in India, which often lack the resources to compete on a global level.
The president of ICAI, Ranjeet Kumar Agarwal, noted in March that of the approximately 100,000 Indian CA firms, around 75,000 are proprietorships, and only 25,000 are partnerships. Furthermore, only about 400 domestic firms have 10 or more partners. This lack of scale hinders the ability of Indian firms to take on large, complex clients that require extensive resources and international reach.
Regulatory Hurdles and International Affiliations
Current regulations are a significant barrier to the growth of domestic audit firms. Over 100 Indian audit firms have international affiliations, but they are unable to fully leverage these partnerships due to restrictions under the CA Act of 1949. These regulations prohibit firms from soliciting work or engaging in branding activities that could help them grow their business. A partner at a Big 4 firm pointed out that ICAI’s stringent regulations seem designed to keep domestic firms small and mid-sized. Additionally, the lack of investment in technology has left many Indian firms behind in critical areas like documentation, which is a crucial aspect of audit quality.
Lobbying by Big 4 firms has also played a role in maintaining the status quo. When the Reserve Bank of India (RBI) mandated joint audits for banks and non-banking financial companies (NBFCs) above a certain threshold, it resulted in a shift of business from larger firms to smaller ones. However, there was significant pushback from powerful industry sections against this norm, which illustrates the challenges faced by smaller firms in gaining a foothold in the market.
Competition Among Non-Big 4 Firms
The competition among non-Big 4 firms is intense, which further complicates the growth prospects for domestic firms. Among listed companies, there is a clear preference for Big 4 firms, leaving over 100,000 smaller firms to compete for the remaining audit business. This fierce competition makes it difficult for any single firm to gain significant size and presence in the market.
Proposed Changes to the LLP Act and Companies Act
In a bid to support the growth of domestic audit firms, the Indian government is considering changes to the Limited Liability Partnership (LLP) Act and the Companies Act. These proposed amendments aim to facilitate mergers and acquisitions among CA firms, allowing them to achieve the scale necessary to compete with the Big 4. The government believes that these changes will enable the creation of large, domestic audit firms that can handle major clients and participate in global markets.
As part of this initiative, the Ministry of Corporate Affairs (MCA) is expected to outline the details of these changes in the government’s 100-day agenda. The amendments to the LLP Act and Companies Act could be introduced during the winter session of parliament in December 2024. In parallel, the ICAI has engaged in discussions with the Ministry and is considering relaxing key provisions in its regulatory framework to support the aggregation of CA firms. This relaxation would give firms more time and flexibility to explore partnerships and enhance their capabilities.
The Road Ahead for India’s Auditing Industry
While the government’s ambition to create a Big 4-like audit firm in India is laudable, the path to achieving this goal is fraught with challenges. The restrictive regulatory environment, intense competition, and lack of scale among domestic firms are significant obstacles that must be overcome. However, the proposed changes to the LLP Act and Companies Act, along with ICAI’s efforts to relax certain regulations, could pave the way for the growth of large, competitive audit firms in India.
The success of this initiative will depend on the ability of domestic firms to adapt to new opportunities, invest in technology, and leverage international partnerships. If these firms can overcome the challenges they face, India could very well see the rise of a homegrown audit firm that can stand shoulder to shoulder with the Big 4 on the global stage.
Courtesy: Financial Express & Economic Times
