M&A Buzz in Auditing as New Cos’ Act Makes Smaller Firms Takeover Targets

Firms such as Grant Thornton and BDO, which have significant presence in India auditing space, are actively looking for buyouts and mergers across tier-2 and 3 cities

“There are many smaller auditing firms that have around 30-40% of their revenues coming from one company . So, in case of auditor rotation three years later, they would lose a huge chunk of revenue. Such firms are target for takeover or mergers,” said Vishesh Chandiok, national managing partner at Grant Thornton India.

Grant Thornton acquired Mumbai-based Thingna & Contractor in September and looks to double its size in the next three years.

Industry trackers say the big four –Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte -audit almost half of the top 100 listed firms. Still, the biggest of the firms are audited by smaller firms. Most of these smaller firms tend to depend on one big client for revenues.

Following the implementation of the new Company’s Act three years down the line, these smaller auditing firms will have to scout for more clients as the compulsory rotation clause would mean that their big clients will leave them.

This provides space for comparatively bigger firms to try and improve their footprint.

BDO, which is one of the top six auditing firms in the country , for example, is looking for consolidation in the coming years. “There is a substantial shift in the Indian auditing market and this would impact the market outside the big four.There are a lot of non-organic growth opportunities for us,” said Arbinder Chatwal, audit director at BDO UK. The firm looks to grow in double-digit annual rates in India.

While Indian laws do not allow foreign auditing firms to directly operate in the country, all the top foreign players have tie-ups with domestic players.

Industry trackers say many firms are also looking for a way around the rotation clause by setting up subsidiaries that can audit their big clients at the time of rotation.

“If anyone actually goes ahead and does this, the government may come down hard on those players,” said the head of a big consultancy.

Currently, the big four are looking to expand in space other than auditing as each of them have only around 20% of their total revenues coming from auditing.

Also, the rotation of auditors would mean that the total expenses for companies would go down because, according to industry trackers, whenever an auditor is changed the auditing fees goes down by 20-50%.

The article appeared in Economic Times . The article can be found here.