12 Oct 2016

Rotation of auditors and its side effects

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The Companies Act, 2013, has introduced important audit reforms. One of the important reforms is rotation of the auditor.

Important provisions under this reform

  • All listed companies; unlisted public limited companies having paid-up share capital of Rs 10 crore or more; all private limited companies having paid-up share capital of Rs 20 crore or more, and all companies having public borrowings from financial institutions, banks or public deposit of Rs 50 crore or more are required to rotate their auditor.
  • An individual cannot continue as an auditor for more than one term of five years and an audit firm cannot continue as an auditor for more than two terms of five years
  • The cooling off period is five years.
  • The provision must be complied by April 1, 2017.

Benefits of this reform

  • This is expected to improve audit quality, resulting in improved financial reporting.
  • Would give local auditors more leverage, if implemented properly along with some other measures.

Local auditors v/s the Big Four

  • Local firms dominate the Indian audit market. However, the presence of the Big Four audit firms (Deloitte, PWC, E&Y and KPMG) cannot be ignored.
  • The Big Four are the largest professional service network in the world. They provide audit, assurance, tax, consulting, advisory, actuarial, corporate finance and advisory services. In India, they cannot provide audit services directly.
    • It is alleged that they flout rules while providing audit and assurance services. Many foreign investors put a condition that the auditor of their choice should be appointed. This helps the Big Four audit firms to grow in India.
    • There is an apprehension that many companies that get their accounts audited by local firms will appoint one of the Big Four or another large international professional service network as auditors.
    • Hence, the Ministry of Corporate Affairs had notified the constitution of a three-member expert group to look into the complaint that the Big Four are circumventing rules and to find ways to help local firms.

Should the government intervene?

  • Local auditors are mostly present in tier 2 and tier 3 cities and audit 62 % of the companies listed on BSE 500.
  • They provide a variety of services to small companies. They lack aspiration to become big.
  • Therefore, it is debatable whether there is a case for government’s intervention to protect local audit firms

Way ahead and Conclusion

Chartered accountants are prohibited from soliciting professional work through advertisement or otherwise. But they can respond to tenders.

  • The practice of issuing a tender for the appointment of internal auditors is quite common among public enterprises. Such a practice is not common among private-sector companies.
  • Tendering is the right method to search for the right audit firm. This increases choice and reduces auditing cost through competition.
  • Companies should not limit their choice to the Big Four and other international firms or a few large local audit firms.
  • There are local firms that have capabilities to audit large and complex transactions. Search through tendering process would help to identify such firms.

It will be interesting to see how the new rules regarding rotation of auditors will actually impact the auditing profession.

 

Source: http://www.business-standard.com/article/opinion/rotation-of-auditors-and-its-side-effects-116100900736_1.html

22 Aug 2016

Government may offer foreign auditors direct access

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In a move that signals the government’s intent to allow foreign audit firms to register and operate directly in the Indian market, the Ministry of Corporate Affairs has written to the Institute of Chartered Accountants of India (ICAI) to seek its views and recommendations on the government proposal.

Currently, Indian laws don’t allow any multinational accounting firm to be registered in India as auditors. The thinking within the government is that as part of an ongoing reforms process, the services sector should also be liberalised and global auditing firms could be allowed to operate directly here to make the profession more competitive and robust.

The ministry has written to the institute on August 10, said ICAI president M Devaraja Reddy . The institute is set to discuss this proposal in a meeting to be held on August 24 and then respond to the the request, he added.

The government will have to amend the Chartered Accountants Act, 1949 that regulates the accounting profession in India to allow foreign firms to operate in India.

Currently, MNC professional services firms that offer auditing services in India, including the Big Four – EY, PwC, Deloitte and KPMG – audit Indian companies through a bunch of their network or affiliate firms.

Though for all internal purposes, the accounting practice in any of the Big Four is treated just as any other practice area like tax, transactions, or advisory , but on paper, the affiliate firms are run as separate partnerships.

If the Indian government does allow direct entry, more global firms are likely to invest big in their India network and also the market could see the entry of new players.

“Given the significant exposure of global investors in Indian firms, it’s natural to ask for an auditor who they are more comfortable with. More global players will mean more choice and better quality of services. It will also enhance the credibility of Indian markets,” says the CEO of a global firm.

For Indian audit firms, the move could spell further trouble, as they have been steadily losing the most lucrative audit assignments to the Big Four over the past two decades.The four global firms now dominate the book-keeping business in India. As it is, the mandatory audit rotation brought in by the Companies Act 2013, is set to kick off from April 1, 2017 and that will further see a movement of big accounts away from Indian firms towards the Big Four and other two prominent network firms, Grant Thornton and BDO.

In major markets, the global giants have a monopoly over the audit business – 99 per cent of companies in FTSE are audited by the Big Four firms, while 86 per cent of those listed on the NYSE work with these audit firms.

But in India, 62 per cent of the BSE 500 companies, including some of India Inc’s biggest firms, are still not audited by the Big Four.For example, Reliance has had Chaturvedi & Shah as auditors for decades, L&T books have been audited by Sharp & Tannan and Hindalco had stayed on with Singhi & Co for long time.In China, the Big Four lost domination to local firms after the government brought in regulations that were unfavourable for the global players. Indian accounting firms are also betting on government regulations that will keep their interests protected.

“The government will have to find a middle ground. It will have to create a regulatory framework that allows the global firms to invest and practice, also keeping in mind the concerns of the Indian accounting firms which service a large section of Indian companies, both big and small,” said the CEO of a leading Indian accounting firm.

2 Jul 2016

Submit data on loan defaulters to credit information firms, RBI tells banks

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The Reserve Bank of India has advised banks and financial institutions to submit data on defaulting borrowers from December 2014 onwards to Credit Information Companies (CICs) and not to the RBI.

Releasing this information, obtained through a portal complaint, Delhi-based Right to Information activist Subhash Chandra Agrawal said on Friday that it is significant to note that the RBI has not so far complied with the Supreme Court order of December 12, 2015, in the RBI vs PP Kapoor (Civil 94 of 2015) case, where it wanted the RBI to make public details of the top 100 loan defaulters among industrialists.

The details required including the names of the businessmen, firm name, principal amount, interest amount, date of default, and date of availing the loan.

In a June 24 letter addressed to Agrawal in response to his PG Portal complaint dated April 24, the RBI said it has submitted to the Supreme Court a list of defaulters above Rs. 500 crore in a sealed cover and claimed that the said information is confidential and requested that it may not be revealed to the public.

The matter is still under consideration of the Supreme Court.

Source: http://www.thehindubusinessline.com/money-and-banking/submit-data-on-loan-defaulters-to-credit-information-firms-rbi-tells-banks/article8797928.ece

27 Jun 2016

Audit giants see dominance waning

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India’s audit landscape is undergoing a quiet change as the new rules for time-based rotation of auditors gather pace.

Early audit changes this year indicate the larger entities, such as Deloitte’s network, could face some pressure on their dominance. And, those lower down the order could gain ground. Leading firms are looking at increasing the focus on quality and are exploring new opportunities, such as private equity-backed ones in the unlisted space. Smaller entities such as Walker Chandiok, part of the Grant Thornton network, have ramped up their staff strength to handle new clients.

Close to 400 companies listed on the National Stock Exchange (NSE) have already changed auditors over the past three years, with clients changing hands among top audit firms. There is also pressure on pricing as the war for market share begins to intensify among top audit firms. This has resulted in a spike in demand for experienced auditors, with joining remuneration seeing 20-30 per cent jumps.

Audit giants see dominance waning
The revamped Companies Act of 2013 said every Indian company with a paid-up equity capital of Rs 20 crore or more was required to replace auditors after two five-year terms in succession. The law had given a three-year transition period for those which had to change auditors, ending March 2017. In the current financial year, 2016-17, around 40 NSE-listed companies have already switched to new auditors. More announcements are expected over the coming three months, shows data from Prime Database. In 2014-15 and 2015-16, a total of 339-NSE listed companies had settled for new auditors.

“We will be rotating off some of the larger companies. Simply because of the number and size of listed companies we audit, there will be changes in our audit market share,” said Shyamak Tata, partner, Deloitte Haskins Sells. He said large-scale changes in their portfolio were only expected from the third year onwards.

The Deloitte group’s network of audit companies is expected to see the largest churn. It has the biggest number of marquee audit clients. The network earned Rs 300 crore in fees for the year 2014-15, representing 15 per cent of the total pie of the Rs 2,000 crore audit fee market for 1,451 NSE-listed firms. It also audited the highest number of listed entities, at 149. The EY network made Rs 121 crore from the 108 companies. The PwC network audited 65 listed ones but had the lowest fee income among the ‘Big Four’ in audit, of Rs 65.6 crore. The KPMG network audited the lowest number of listed entities, at 58; however, it earned more than PwC at Rs 99.4 crore. Companies are still in the process of reporting the FY16 numbers.

Churn on
Early numbers suggest this pecking order is already going through a churn. A Business Standard analysis of data provided by Prime Database showed of the 41 auditor changes reported so far this year in listed companies, the KPMG network was the biggest gainer, with 11 new firms for the financial year ending March 2017. It was rotated out of two existing clients, a net gain of eight for FY17. The EY network added six and lost two, while Walker Chandiok gained a lone company. The PwC and Deloitte networks have lost more than they’ve gained so far this year. At the end of the changes, other smaller audit firms had 23 clients, up from 18 in FY16, among these 40 companies.

Grasim, Cipla, Biocon, Vedanta, Hindustan Zinc, United Spirits and Century Textiles are some of the large companies that have reported auditor changes for the new financial year.  In FY16, as many as 168 listed companies changed their auditors. The Deloitte network was the top gainer among the first five, gaining 17 and losing 11. The KPMG network was also a net gainer, with seven gains and four losses. EY, PwC and Walker Chandiok lost more than they gained.

In FY15, when 171 companies changed auditors, Walker Chandiok’s client list swelled by eight. While the EY network and Deloitte registered a net gain of one each, the KPMG and PwC networks recorded a net loss of four and one, respectively.

Strategy
Deloitte, expecting a strong attack on its dominance, is looking for greener pastures. “We are large in the listed company space, and have a majority share across industry sectors.  Our audit breadth and experience in this changing regulatory environment provides us, currently and over the next two-three years, an opportunity to provide audit services to untapped listed and unlisted entities, with a bias in favour of unlisted clients,” said Tata.

Other large entities are also gearing up for the transition. Russell Parera, partner, Price Waterhouse Chartered Accountants LLP, said his network had embarked on a transformation programme focussing on people, technology and processes for close to two years. “We have taken significant efforts in training our people for this change. Also, with rotation kicking in, it is going to be important to focus on investing in relationship building.”

The PwC network also bets on technology as another aspect, which will go a long way in these ever-evolving market scenario. “Today, technology has become a crucial enabler, with more data audits getting conducted. It is also relevant in cross border and multi-location audits to ensure consistency. We as a firm have been preparing for this change,” Parera added.  Tata of Deloitte spoke of pricing pressure in certain pockets. “We are seeing this as a section of the market looks to gain market share.  There will be some short- term blips. However, with continuing investment in innovation and quality, which will lead to enhancing value to clients, over the short term, this will correct. We already have a large pool of audit talent. We are looking at consolidating and not dramatically increasing the headcount. Audit will remain the primary identity of our firm and, with our focus on quality, we will retain our leading position in the overall  space.”

Impact
According to Akhil Bansal, deputy chief executive of KPMG India, with European audit rotation also coming into effect, the impact of Indian mandatory company rotation regulations will be felt around the globe. “The choice of the audit firm in India might influence the choice in Europe and other geographies,” he added. Bansal said the impact of mandatory firm rotation will also be felt on other services, including internal audit, due to stringent independence requirements. “It is important that the companies make their choice of audit firm early, since the best resources will be committed to clients who are first off the block,” he said.

Audit companies have been preparing for this, with investment in personnel, training and ramping up headcount numbers. For instance, the Grant Thornton network plans to double its auditor numbers across its network from 1,500 to 3,000. Vishesh Chandiok, national managing partner, Grant Thornton India LLP, said: “Several local Indian firms are very competent and the belief that only us international firms are the option is misplaced. Not all 50,000 firms for each company but certainly 50 firms can audit most companies, not only four of five firms.”

The EY group, which has 3,000 auditors across its network, added 400 over the past 12 months. “Internally, our focus continues to be on strengthening our teams with more hiring, greater investments in training, sharpening technical and industry capabilities  and increasingly, using more technology and, data analytic tools when performing audits,” said  Sudhir Soni, national leader, SR Batliboi, the Indian member-firm of EY Global.

Most audit companies have resorted to internal promotions and inducting of new talent to expand resources.

With the threshold for audit rotation being low, most audit companies are looking at tapping the unlisted private audit space in a big way. That’s a space the Deloitte network companies plan to play the game hard, indicated Tata. The client churn among audit firms is expected to last over the next two-three years, before it stabilises.

Source: http://www.business-standard.com/article/companies/audit-giants-see-dominance-waning-116062600777_1.html

22 Jun 2016

Presumptive taxation: No audit for turnover up to Rs 2-cr

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Small businesses with a total turnover of up to Rs 2 crore will not be required to get their accounts audited if they opt for presumptive taxation scheme, the finance ministry said on Monday.

“The higher threshold (up to Rs 2 crore) for non-audit of accounts has been given only to assessees opting for presumptive taxation scheme under section 44AD,” the ministry stated.

Section 44AB of the Income Tax Act makes it obligatory for every person carrying on business to get his accounts of any previous year audited if his total sales, turnover or gross receipts exceed Rs 1 crore.

“However, if an eligible person opts for presumptive taxation scheme as per section 44AD(1) of the Act, he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed Rs 2 crore,” the statement said.

Finance Minister Arun Jaitley in the 2016-17 Budget had proposed to increase the turnover limit under the presumptive taxation scheme under section 44AD of the Income Tax Act to Rs 2 crore “which will bring big relief to a large number of assesses in the MSME category”.

Jaitley had said if the taxpayer opts for the presumptive taxation scheme, he has to remain in that scheme for 5 years.

Source: http://www.business-standard.com/article/economy-policy/presumptive-taxation-no-audit-for-turnover-up-to-rs-2-cr-116062001050_1.html

28 May 2016

Now, listed companies’ management to explain audit qualifications : SEBI

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Markets regulator Sebi today asked listed companies to disseminate cumulative impact of audit qualifications in a separate format along with the annual audited financial results to the stock exchanges.

Besides, the management of a company would be required to explain its view about audit qualifications.

The new framework would ensure that the impact of audit qualifications are clearly communicated by the companies concerned to their investors in a timely manner apart from streamlining the whole process.

Sebi decided to have the new system on audit qualifications after extensive discussions with its advisory committees, Institute of Chartered Accountants of India (ICAI), stock exchanges and industry bodies.

Now, listed entities will be required to disclose the cumulative impact of all audit qualifications on relevant financial items in a separate form called ‘Statement on Impact of Audit Qualifications’ instead of the present form.

Such disclosures will have to be made in a tabular form, along with annual audited financial results filed in compliance with the listing regulations.

The new mechanism will be applicable for all the annual audited standalone/consolidated financial results, submitted by the listed entities for the period ended March 31, 2016 and thereafter.

The listed entity will have to furnish a declaration in case there are no audit qualifications.

In case of audit reports with modified opinion, a statement showing impact of audit qualifications will be filed with the stock exchanges in a format specified by the regulator, Sebi said in a circular today.

Issuing a format for ‘Statement on Impact of Audit Qualifications’ for the financial year, Sebi said that companies will have to disclose net profit, networth, turnover, total expenditure, earning per share, total assets and liabilities.

Besides, the firms will have to make submission about details, types, frequency of audit qualification. The management will have the right to give its views on the audit qualification.

Also, the management of the listed entity will have explain its views on the audit qualifications.

“Where the impact of the audit qualification is not quantified by the auditor, the management shall make an estimate. In case the management is unable to make an estimate, it shall provide reasons for the same. In both the scenarios, the auditor shall review and give the comments,” Sebi noted.

Source: http://www.business-standard.com/article/pti-stories/now-listed-cos-management-to-explain-audit-qualifications-116052700918_1.html

27 May 2016

SEBI to delist 4,200 firms; warns erring promoters, auditors

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Capital markets regulator Securities and Exchange Board of India (SEBI) is planning to take a number of steps to deepen it, including forcing thousands of non- or poorly-traded companies to delist and introducing more trading instruments, especially in the commodity space.

These were among some of the steps it outlined with a meeting with senior editors today.
The news would come as relief to investors, whose monies are stuck in companies where no trading takes place.
SEBI chief UK Sinha said the regulator plans to force promoters of companies whose shares do not see active trading both at the main bourses and in regional exchanges to delist.
Such promoters will have to provide an exit route to investors, failing which they will be penalised.
India has about 8,000 listed companies but active trading hardly takes place beyond the top 1,000. As many as 1,200 companies have been suspended for trading for over seven years now, and these will be the first that will be forced to delist.
Besides, there are over 3,000 companies listed on various regional stock exchanges that have become defunct, Sinha said.
The exercise for over 4,200 listed firms would be completed this year. Such exercises would be taken up going forward to clean up the market from what the SEBI chief described as “a source of nuisance”.
He also warned of strong action against the auditors who close their eyes to the lapses in the financial accounts of listed firms.
“So far, we have had a hands-off approach on auditors, but we will take action if something serious comes to our notice. Auditors cannot go scot-free if they have been certifying the books for years without pointing finger at the lapses,” Sinha said.
SEBI also plans to launch more instruments, such as options contracts, in the commodity markets, and will also introduce more commodities for trading.
Sinha also discussed steps that the regulator has taken to ease entry for foreign investors in India, saying that easier FPI registration rules have paid off.
“The number of registered FPIs increased to 8,721 from 4,580 in 2014,” he said.
He also said costs of mutual fund and insurance products in India need to come down and said the regulator had invited former UIDAI chief Nandan Nilekani to advise it on creation of tech platforms for sale and purchase of mutual funds.
“We are also looking to tweak listing rules for startups,” he said.