Indian Audit Firm can break the Big Four's oligopoly
Created on 02 Apr 2020
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Updated on 14 Jan 2023
The Big Four Oligopoly in India
An oligopoly is just like a monopoly. Just that instead of a single organization controlling the market, it is a nexus of more than one company. One such oligopoly is the ‘Big Four’. Deloitte, KPMG, Ernst & Young, and PricewaterhouseCoopers- together form the world’s largest professional accounting and consulting network, popularly known as the Big Four. This oligopoly has indirectly controlled an entire process of firm auditing. However, the time seems to come to move towards ending this oligopoly.
Every person or organization that does business has to maintain the records. These sales and purchase records are summarized in the form of accounts. What would happen if these numbers in the accounts were fudged? Investors, promoters, and tax officials will get the wrong information. The decisions taken by all these would not align with the situation. You cannot reach the right solution for solving the wrong problem. These fudged numbers will affect the company, its investors, and the growth of the country and its citizens.
To tackle this problem, there is a need of auditing the accounts. One popular auditing is the external audit. A separate auditor does it and releases a statement at the end of the audit. Now, there is a need for trust with this auditor. If I tell others that you are a good investor, people might not believe me because I am not a prolific investor. What would happen if the great Warren Buffet says the same thing about you? People would rush to you for advice like crazy! This is why trust matters.
Hence, if a credible auditing firm says that a company is doing fine, investors believe it. They might not believe the company, but they believe the statement of the audit firm.
The Big Four
This credibility amongst investors is well established by four auditing companies. These companies are Deloitte, KPMG, EY, and PWC. They enjoy the immense trust of investors. Their revenues for the FY 2019 ranged $30-$40 billion. These companies audit Indian firms as well. According to the report by NSE and Prime Database, by the end of FY 2018, the Big Four dealt with 283 richest companies of the Nifty 500. In fact, out of 1813 listings in NSE by FY 2019, 26% are audit by the Big Four. They take home 30% earnings of the auditing services business.
The Problems with the Big Four
The Big Four or other such companies do not limit their services to auditing. They also provide taxation advisories, legal services, management consultations, and even financing! This creates a conflict of interest. Suppose my company is using the taxation advisory services of KPMG. Meanwhile, I also ask KPMG to audit my company. If the KPMG now submits a poor audit report of my income and cash flows, would I still like to continue with their advisory services? No. I would rather choose some other company from next time and take their advisory service as well.
This example is quite close to reality. The advisory services contribute a lion share of 26% in the income of these Big Four.
The Last Nail
Another bigger problem we have seen recently is in the vicinity of the IL&FS crisis. The infrastructure financing firm was audited by Deloitte. Despite being the best amongst the best four auditing companies in the world, they could not identify anything wrong with the IL&FS. They issued a clearance statement that made banks and investors confident enough to invest in the IL&FS.
We all know what happened to IL&FS later. It went bankrupt taking away ₹95000 crores investor money to dust. The role of Deloitte can be considered inefficient and maybe unethical too. This charge holds weight as the Ministry of Corporate Affairs went against Deloitte in the National Company Law Tribunal (NCLT) where Deloitte was handed a five-year ban from its business. The Serious Fraud Investigation Office clearly states that Deloitte was guilty of deliberately misinforming the poor health of the firm.
Breaking the Oligopoly
The government has been proactive post the IL&FS fall, which is now being called the IL&FS scam. It went against Deloitte and won in the NCLT. Worst is that this did not happen for the first time. SEBI barred PWC in 2018 for two years citing its similar role causing the Satyam Scam.
The government now understands that oligopoly has created a set of problems. Since their business demands credibility, where the Big Four stand tall, they ran the business at their own will. IL&FS crisis manifests that. Their financial interests in the client company also push auditors to turn a blind eye leading to corporate fraud. Also, it is also wary of the dominant position of the Big Four. The Ministry of Corporate Affairs has approached the ‘Competition Commission of India’ to oversee any role of the Big Four in erecting barriers to the Indian auditing firms from entering or expanding in this lucrative business.
The government has started looking for plugging the legal loopholes. One such proposed move is to prevent auditing firms from providing any non-auditing services. The advisory and consultation services might come to a stop. The audit companies will also have to disclose any past engagements with the client. An individual auditor cannot take up more than 20 companies to audit. However, there is no such rule for an auditing company. The government is in discussion to limit this number. One area of concern is that though the auditors are appointed in the name of shareholders, their appointment and dismissal is a subject of company management in reality. Hence, the auditors seem to lean more towards the management, rather than the shareholders, in their findings.
Not just in India, even the UK government is planning to establish new norms to break this oligopoly of the Big Four amidst the corporate lapses.
India is seeing a lot of corporate frauds in current times. DHFL, Karvy, FIS India, Yes Bank and PMC Bank are just a few to be named. India needs a new set of credible auditing companies that challenge this oligopoly and turn it into a competition based on the quality of auditing. This will enrich the entire Indian corporate governance scenario.
Fortunately, Grant Thornton’s Walker Chandiok & Co is now auditing India’s fourth most number of companies, subduing the PWC. This has managed to break the hegemony of the Big Four for the first time. Hopefully, more Indian auditing companies like Singhi Group, MZSK, and Haribhakti & Co would rise to the occasion and ensure that the trust in the auditing firms builds up. Though currently they audit only 10-15 listed companies of Nifty-500 unlike 60-70 of the Big Four, yet they can fill in the vacuum that is developing due to the mistrust on the Big Four. Who knows? Today they capture the Indian market, tomorrow they reach out for the world.
A good chain of auditing firms is the first-line defense against the NPAs, and the company defaults and bankruptcy.
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