Government dismisses charges against Big 4 audit firms in surrogate practice case

The Ministry of Corporate Affairs has given a clean chit to the Big 4 audit firms – Deloitte, PwC, EY, and KPMG. The report released by the Committee of Experts (COE) says that the government should continue to allow the multinational audit firms to operate in the country.

In the 200-page report, the CoE has observed that the term Multinational Accounting Firms (MAF) is a misnomer and that being merely part of a network and sharing of global costs do not make these Indian network firms MAFs as they are neither owned nor controlled by the international network/entity.

The legal trouble brewed for the Big Four audit and accountancy firms when complaints by Indian firms to the government were filed stating that the foreign ones were apparently flouting norms and gaining undue advantage. The Indian firms slapped notices on them for surrogate practice of law.

The Indian Auditing Firms (IAFs) were losing clients to multinational competitors due to audit rotation mandated by the Companies Act 2013 that took effect on April 1, 2017.

The fight between multinational auditing firms (MAFs) and Indian auditing firms (IAFs) intensified two years back because of this mandatory rotation. Foreign firms are not allowed in auditing, but MAFs operate through network firms that do not use the multinational’s brand name.

MAFs have come under scrutiny as some got entangled in controversies such as those involving fraud-accused jeweller Nirav Modi or Infrastructure Leasing & Financial Services (IL&FS).

Network firms of Deloitte were auditors to both, while a network firm of EY is the current auditor of IL&FS. In many bankruptcy situations too, network firms of the Big Four were found to be the auditors. Several domestic firms wanted the foreign ones barred from India.

The committee has recommended amendments to the Chartered Accountant (CA) Act and Regulations to further open the audit profession. It has said in its recommendation that in order to increase competitiveness of Indian audit firms, collaborations with global auditor networks should be allowed and accordingly recommends changes in the laws governing such collaborations.