A Dark Phase Comes over the Big Four

A depressive period may start in the Indian auditing industry as three of the four big accounting firms will stop operating in the country. Owing to alleged auditing discrepancies, the Indian government has already banned PwC (PricewaterhouseCoopers) for two years, while two other accounting firms could be asked to cease operations for five years.

According to Prime Database, the four big accounting companies manage financial reports of 67 per cent of NSE listed companies. So, by stalling operations of these four network firms, the government will be creating disruption in the business ecosystem as most of the listed companies have appointed one of these four firms as their statutory auditor, as reported by the daily news, Business Standard. 

Deloitte and BSR Likely to be Banned Following IL&FS Case

Being statutory auditors of infrastructure company, IL&FS, Deloitte and BSR have come under scrutiny by numerous regulatory bodies. The defaulter infra company did not pay off deferred payments of bank loans, long term, as well as short term deposits and could not meet commercial paper reclamation, owing to which the company had weakened financially and later, closed down.  

When financial crisis unfolded in IL&FS, investigative and regulatory bodies tightened their grip over two auditors, Deloitte and BSR, so as to find out alleged discrepancies that were present in the company’s accounts.

Serious Fraud Investigation Office (SFIO), Ministry of Corporate Affairs (MCA), National Financial Regulatory Authority (NFRA), Securities and Exchange Board of India (SEBI),  and Enforcement Directorate (ED) are investigation and regulatory bodies, which have begun probes against the two auditors. 

The allegations that have been made against Deloitte and BSR, an affiliate of KPMG, are the unflagging actual financial backdrop, evergreening accounts of IL&FS, misreporting capital worth of the infra company and not bringing poor circular transactions in government’s attention. 

 As a result, all six bodies are charging auditors under different sections of the law. For instance, MCA asks NCLT (National Company Law Tribunal) to ban the two auditors for a period of five years under the Companies Act, Section 140(5). On the other hand, NFRA, which was formed last year, has the power to ban an auditor from six months to ten years and fine them with a penalty ranging from INR 1 lakh to 5 times for individual auditors and INR 10 lakh to ten times for auditing firms. 

By baring Deloitte and BSR, the accounting companies’ business would be affected in India and further, cease auditing services that they offer to 167 listed companies and 175 listed companies respectively. 

Debarred PwC (PricewaterCoopers)

The London-based accounting firm, PwC was banned last year for two years for alleging discrepancy in Satyam Computer Services Limited. SEBI (Securities Exchange Board of India), which is a regulatory body, debarred the accounting firm after ascertaining that the accounting company did not verify accounts of Satyam Computers properly.

In addition, SEBI found numerous fake sales invoices which were recorded in out of the routine course, as reported by the daily news, First Post.

Currently, this is the first term of PwC, which is facing a two-year ban and thus, the London-based accounting firm alongside the other two auditing firms is out of Big Four networks in India. With the exclusion of auditing firms from Indian business ecosystem, listed companies, those accounts Deloitte and BSR are managing, would be affected as they would have to look for smaller auditing firms such as Grant Thronton, BDO Global and Mazars.

Barring EY’s Member Firm, S.R.Batliboi & Co. LLP   

Since three auditing firms out of the big four will not be functioning in India, EY (Ernst & Young) will be the only auditing firm that would be working in the domain. However, RBI (Reserve Bank of India) has recently barred a member firm,  S.R. Batliboi & Co. LLP of EY from managing auditing assignments of commercial banks for a period of one year.

“On account of the lapses identified in a statutory audit assignment carried out by the firm, M/s S.R. Batliboi & Co. LLP chartered accountants, it has been decided that RBI will not approve the said firm for carrying out statutory audit assignments in commercial banks for one year starting from April 1, 2019," the regulator said, as reported by daily news, Mint.

Owing to the regulatory bodies’ orders, almost all of the four big accounting firms have been ruled out from the Indian domain. The consequences of the debarment are yet to be seen by the business companies and the Indian economy as a whole.