Most of India’s biggest listed companies choose to work with network firms of the Big Four auditors, official data showed, indicating auditor concentration among premium clients and diluting the purpose of mandatory auditor rotation.
Even though India has more than 2,300 statutory auditors, most large companies go for network firms of Deloitte, KPMG, PwC and EY.
Data from audit regulator National Financial Reporting Authority (NFRA) also showed that at the same time, nearly 70% of all statutory auditors work with just one client, indicating smaller auditors find it hard to get a foothold in the upper end of the audit market.
The absence of competition in the audit market is a big worry for regulators worldwide, but executives with large audit firms said large companies prefer them for valid reasons. “If all large businesses choose from three or four audit firms, then how can auditor rotation be meaningful? As in every industry, competition is vital in the audit world as well,” said a person with knowledge of NFRA’s estimate of the audit industry.
Under the Companies Act, large companies and big borrowers have to mandatorily rotate individual auditors after five years and audit firms after 10 years.
These include listed companies, public companies with paid-up capital of ₹10 crore and above, private limited firms with paid-up capital of ₹20 crore and above, and all companies with ₹50 crore and above borrowings from public institutions, irrespective of their paid-up capital. The cooling-off period between two assignments is five years. Audit rotation seeks to enhance the integrity of auditing and reporting quality besides opening up opportunities.
The number of big auditors has come down from big eight in the 1980s to big four now due to consolidation and the failure of one firm; and any further consolidation could narrow competition which is not a good idea, the person cited above said. Emails sent to NFRA, EY, KPMG, Deloitte and PwC seeking comments remained unanswered till press time.
The network firms of the Big Four audited 522 companies in FY19, representing 75% of the market capitalization of the 5,023 listed firms for which data is readily available, NFRA data showed. This represents about 10% of the listed firms by number. On the other hand, 1,578 auditors audit only one company each, accounting for a small fraction of the listed companies.
However, the silver lining is that the level of audit concentration in India is less worrying than in some other western economies. Reuters reported in July from London, citing audit watchdog Financial Reporting Council (FRC), that the big four audited all FTSE 100 companies in a roughly even four-way split.
A senior executive at one of the big four firms said there are different segments in the market, and some large firms do not see value in assigning statutory audits to smaller audit firms for reasons that are no different from the trend seen in other markets.
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