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October 28, 2010

Indian profession split over Satyam audit reform

The Indian auditing industry is divided over reforms that could radically change the shape of the audit market following the Satyam scandal. It appears a split has occurred between the nation’s largest firms, including the Big Four, and the audit regulator Institute of Chartered Accountants of India.

The International Accounting Bulletin approached senior employees at the Big Four who would only speak about the reforms anonymously while investigations into Satyam continue. The ICAI is trying to clamp down on the Big Four’s audit operations and has questioned the quality of their work in comparison with domestic Indian firms.

The regulator is demanding more power to take action over audit firms. The Big Four are not keen on the ICAI’s ambitions because of a long lasting disconnect between the Big Four and the regulator, which has intensified since the Satyam fraud, according to sources from the Big Four. This is mainly due to a large proportion of ICAI members being independent CAs and accountants from small- to medium-sized audit firms. Small firms claim the Big Four is taking their business away due to being larger in size and affiliated with global networks.

“The ICAI is dominated by have-not firms. They are keen on audit rotation so that some business falls into the laps of the have-nots,” says Nawshir H Mirza, who has served as senior partner of SR Batliboi & Co.

“The ICAI is suffering from the ‘first, large corporate fraud syndrome and is, therefore, making recommendations that are not practical,” another senior CA added.

Post-Satyam, ICAI presidents have come down heavily on the Big Four. Uttam Prakash Agarwal, the previous president of the ICAI, said the Big Four are circumventing laws by providing auditing services in the country.

Chopra echoes this view: “The Big Four can’t resort to surrogate practices. Many of them have come in via the FDI route. They were permitted to come in as consultants but they are doing audit function. This must not be allowed.”

In fact, Chopra categorically wants more business to come to small- and mid-size audit firms.

“We believe in the concept of a joint audit. Under this concept, audits are undertaken by big and small firms,” he said. According to Chopra, the rotation of auditors will not help small firms but joint audits will.

“We have good audit firms in India and they have the ability to conduct the audit better than many transnational firms,” the ICAI chief added.

There is a clear division between the Big Four and the ICAI and audit reform could well depend on who succeeds in this battle for influence.

The International Accounting Bulletin has published an in-depth report that examines the audit reform proposals. It is open to subscribers and linked below.

Find out more: Satyam scandal: A new dawn?

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