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“For instance, if an Indian chartered accountant (CA) firm has to become a global firm, it would have to enter into partnerships with overseas firms as it cannot set up its own audit firm in the UK or in the US because it needs to give 51% voting to the locally-qualified CAs in those countries."
India has over 1,000 CA firms, which is disproportionately high as compared to matured markets. However, domestic audit firms across the board are facing the regulatory heat of late. Vishesh C Chandiok, CEO of Grant Thornton Bharat, speaks to Manu Kaushik on the audit regulation, the issues concerning it and the way forward for the profession. Edited Excerpts:
I think the multiplicity of regulators is a challenge. The National Financial Reporting Authority (NFRA) is the new regulator, while the ICAI is the old licensing body for the profession. Then, there are the Ministry Of Corporate Affairs, SEBI, RBI, etc., whose mandates and audit profession need interfaces. At this juncture, there is a lack of clarity on whose domains lie where and to what extent.
We already have a 10,000-plus workforce in India. We (Grant Thornton Bharat) would like to have one enterprise in India, which is an audit and consulting firm, but the regulations do not allow this. The regulations only allow us to have an affiliate for audit, which is Walker Chandiok & Co LLP right now.
Another big challenge for the profession is to remain attractive to high-quality talent. I think for this, the professionals have to understand the difference between audit of PIE and private audits, and the regulators have to ensure there’s proportionate response to these two domains.
I think the firms have to do much better and understand that it’s a real responsibility when they take on the audit job. After, people’s pension and retirement savings could go for a toss when a company goes bankrupt.
I think NFRA is the best thing that has happened to the public interest entities and the audit profession. The western market shifted to independent regulation of PIE some 20 years ago. In IFIAR, we have a robust global association of independent audit regulators. India was not getting membership of IFIAR because the Quality Review Board (QRB) is regarded as an independent audit regulator, and this is housed in the ICAI. QRB was not given membership (in IFIAR), but now NFRA is a member.
I’ve seen the reports of all the five firms. The role of the regulator is to go through the files and say what could have been different in their view. Any individual who looks at it may have different views. These are great inputs, but they have not said whether our work was of poor or good quality. They don’t comment like that. Over time, the (inspection) will classify the firm-wide quality control and engagement performance. That’s the way the PCAOB (of the US) does it, for example.
Nobody can doubt the vision, but it will also require an enabling regulatory environment and an understanding of how audit as a business is regulated across the world. It is not just audit, but assorted CA services that are restricted to be performed by licensed professionals. In all markets in the world, there are some restrictions, but these are very progressive. The enabling regulations in India haven’t kept pace.
For instance, if an Indian CA firm has to become a global firm, it would have to enter partnerships with overseas firms as it can’t set up its own audit firm in the UK or in the US because it needs to give 51% voting to the locally-qualified CAs in those countries. You can’t do it today because it will violate the ICAI’s rules that mandate all partners to be Indians in the firm. That is why even the so-called Big Four did not evolve as one global partnership. They have country-specific partnerships because regulations don’t allow it. It’s very complex.
Right now, the narrative in the profession is largely around MNC audit firms versus domestic firms. Actually, there is nothing called a multinational accounting firm (MAF). It’s already been called a misnomer by the parliamentary standing committee that was set up for this purpose. All the firms are country-by-country partnerships. But, India should allow up to 49% of the partners to be non-Indian CAs in the domestic firms.
I think the biggest change is in the use of analytics to pull the client data or to link it to the client systems and run pre-built routines on the data. We have our own proprietary tech, which was developed in India. It’s an analytics engine which basically plugs into the client’s system and can run checks that otherwise would have to be done manually. It allows us to do things at scale and quickly. The second shift is the use of AI. We are evaluating if AI can help us automate some of the procedures.
The interview was published on 25th March, 2024.