MUMBAI: As the government mulls capping non-audit work in
firms in a bid to curb conflict of interest situations and tighten independence, contrary to popular belief, the impact on the Big Four firms will be marginal while the smaller firms which audit the majority of 6,000 plus listed companies may get hit more.
Tax will be one area which will be hit the most because in most cases companies club tax advisory and audit together to complete compliance work efficiently.
For any of the Big Four firms, it will be almost a zero-sum game, as most of the work they resign from will be picked up by one of their competitors but due to relationship-driven nature of tax work, some assignments may flow to smaller firms.
According to the experts, the percentage of tax work originating from audit clients may vary from 10% to 20% between the top four firms.
The smaller firms often earn more from the tax work they do for audit clients compared to what they make in audit fee.
Even in India, the non-audit work from audit clients has shrunk due to Companies Act restrictions, internal risk regulations of the firms and in some cases the governance mechanisms of companies which forbid nonaudit work to go beyond a certain percentage of audit fee. “Over the last few years, the non audit work from the listed audit clients has shrunk significantly in the bigger firms,” said Ketan Dalal, managing partner, Katalyst Advisors, ex-national tax leader, PwC. Experts feel the move may be good from a governance perspective.
“Curbs would lead to more independence but the bigger firms will feel little or no impact. Work will again be just re-distributed between to the top firms or some specialist firms,” said Girish Vanvari, Co-founder, Transaction Square.
Currently, the firms can’t do any assignments that could impact the financial statements: like restructuring, corporate finance, tax structuring, cost optimisation and valuations. Also variable fee projects are not allowed and IT assignments like SAP implementation where the firm will have to appraise its own work.
In India, ICAI regulations forbid auditors from earning more from non-audit services than the audit fee. The curbs won’t hurt the big firms due to the fact that more than 50% of audit work for the top four firms comes from MNCs which adhere to strict rules set by the US SEC and EU regulators related to non-audit work. Due to increasing global regulatory stipulations, over the last 7-8 years, the firms already have cut down on non-audit jobs in MNCs.
A big focus for the big firms in the past two years has been selling services — consulting, transaction and tax — to the hundreds of old audit clients who were rotated out during companies lawmandated audit rotation but companies share a deep years long relationship with.
In a first, Grant Thornton India has announced that the firm along with its affiliates will not bid for consulting and transaction advisory services from listed companies that are being audited by them from July 1.
The curbs may work well for the pure-play consulting firms like McKinsey, BCG and Bain who are not tied into any independence rules at all to expand their business.
Globally, regulators have been worried about the impact non-audit work have on audit and have time and again posited that auditors must be independent in fact and in appearance. For instance, Sarbanes Oxley Act, 2002 in the US listed eight services which the firms couldn’t provide to their audit clients; in 2016, EU brought in similar prohibition and has also introduced caps on fees from nonauditing services along with disclosure obligation on the total fees received from listed entities.
MCA’s committee of experts report on multinational audit firms in India recommended a cap of 50% of audit fee for non audit services for listed companies or their subsidiaries.