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Big 4 audit companies may suffer revenue hit due to conflict of interest norms
November, 22nd 2018

A high-level government committee that recently gave a clean chit to multinational professional services firms including the big four — Deloitte, PwC, EY and KPMG has, however, proposed some restrictions on these firms that may impact their revenues.

The report of the ministry of corporate affairs committee has called for restricting the non-audit work these firms can accept from listed companies, and barring them from offering certain services to their audit clients. ET has reviewed a copy of the report.

It seeks to impose two conditions on multinational professional service firms: that their revenues from non-audit work from a listed company should not exceed 50% of fees paid for audit work; and, they should not do taxation, valuation and restructuring work for companies they audit.

The proposed norms are in line with global standards, industry trackers said. “The report seeks to restrict the auditors from carrying out certain services and it is adhering to the principle of independence of auditors,” said Dinesh Kanabar, CEO at Dhruva Advisors, one of the biggest Indian tax firms. “This will ensure that the auditors focus on what they need to do as auditors rather than look at opportunity to render other services to the clients.”

ET spoke with India heads, audit practice leaders and several senior partners at the big four, and their next two big multinational service providers, BDO and Grant Thornton. They said such restrictions could cause a lot of disruption for companies they audit.

“It would be impractical to actually implement these recommendations,” said the head of an audit practice. These firms are now conducting internal analysis as to how much impact these measures would have on them and what actions they could take in the coming year. Industry insiders said audit work may lose its charm among these firms.

“If it comes to either or, then letting go of an audit client might be easier as we don’t get much revenue for auditing anyway,” said a senior partner with one of the firms. “We actually lose money on some of the biggest clients in auditing as we have to deploy hundreds of people but fees collected are paltry,” the person told ET.

Audit accounts for about 15-20% of revenues of international professional service firms in the country with the rest 80-85% of their revenues coming from non-audit work such as taxation and consultancy. But some other services like taxation are sometimes packaged along with auditing.

According to insiders, about 25% of the revenues of all the foreign firms come from non-audit work they offer to their audit clients. Most firms are seeing growth from their taxation and consulting verticals. Interestingly, it’s not just the international services providers that are upset with the expert panel report.

Some Indian firms have come out against the report, alleging that it doesn’t represent the industry. “Some of the stakeholders like Sebi (Securities and Exchanges Board of India), Quality Review Board, Indian audit firms, and senior members of ICAI (Institute of Chartered Accounts of India) are not well represented in the report,” said Vinayak Padwal, partner at MSKA and Associates.

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