Big 4 Audit Firms In Big Trouble
The ‘Big 4’ audit firms service a third of India’s listed companies audit business by value. Between them PwC, Deloitte, KPMG and EY and their many affiliate firms in India audit close to 60 percent of the Nifty 500 companies, as per 2017-18 data published by Prime Database.
Over the last two decades, the expansion of these large audit firms in India, known as the Big 4 globally, subsumed several local Indian firms such as BSR & Associates, AF Ferguson & Co., SR Batliboi & Associates. While many retain their Indian identity due to Indian laws, the loose networks they form have grabbed audit assignments of India’s biggest companies. Foreign investors, too, have found comfort in knowing that the Indian company they are investing in is audited by a brand they recognise. But that brand and quality promise seems to be fading.
In the past few years the Big 4, which audit over 90 percent of FTSE 350 companies in the U.K. and S&P 500 companies in the U.S., have made the headlines due to several audit failures across the world.
Satyam Computer Services Ltd. was a leading information technology company headquartered in Hyderabad, India. In January 2009, its promoter Ramalinga Raju confessed to large scale manipulations of financial earnings. Following that market regulator Securities and Exchange Board of India issued show cause notices to PWC network firms, the auditors of Satyam since April 1, 2000.
Completing its investigation in January 2018, SEBI banned PwC network firms in India from issuing any certificate of audit for listed companies for a period of two years. The regulator also ordered disgorgement of Rs 13,09,01,664 from a PwC network firm and two partners. PwC has appealed the matter which is currently pending at the Securities Appellate Tribunal. Meanwhile, the Supreme Court granted interim relief to PwC by allowing it to continue with auditing assignments till March 2019 or till a final decision is taken by the SAT, whichever is later.
SR Batliboi & Co. is an audit firm that is part of the Ernst and Young India network. It is the statutory auditor for leading Indian banks such as HDFC Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd. and Bandhan Bank Ltd. On June 3, the Reserve Bank of India barred SR Batliboi from doing statutory audits of banks for one year. The RBI said it observed lapses in a statutory audit assignment and hence would not approve the firm for carrying out bank audits for a year starting April 1. All banks need the RBI’s approval for auditor appointments. Due to the RBI sanction, HDFC Bank, which was set to reappoint SR Batliboi as auditor for three years picked another firm — MSKA & Associates — in its place.
Deloitte Haskins and Sells was the auditor of IL&FS Financial Services Ltd. during 2012- 2017. The collapse of its parent Infrastructure Leasing & Financial Services is among the biggest such financial failures in India of a non-banking finance company prompting the government to supersede the IL&FS board and put an independent team, headed by banker Uday Kotak, in charge of IL&FS and its group companies.
An investigation by the Serious Fraud Investigation Office has found several accounting lapses in Deloitte’s audit of IFIN leading it to initiate criminal complaints in a special court against the audit firm and some of its partners involved in the audit of IL&FS and its group companies. Earlier this week, the Ministry of Corporate Affairs filed an application with the National Company Law Tribunal seeking a five-year ban on Deloitte Haskins and Sells and BSR Associates, a unit of KPMG, the past and current auditors to IFIN.
BSR & Associates, a network firm of KPMG India, has been the auditor of IFIN since financial year 2017-18. Subsequent to the collapse of parent IL&FS and financial failure at several group companies such as IFIN, the Ministry of Corporate Affairs is seeking removal of BSR & Associates as an auditor of the company with immediate effect. The SFIO report alleges several lapses by the firm in the audit of IFIN and collusion with the IFIN management. Earlier this week the Ministry of Corporate Affairs filed an application with the National Company Law Tribunal seeking a five-year ban on BSR & Associates and Deloitte Haskins & Sells, the past and current auditors to IFIN.
To be clear, in financial year 2017-18, SR Batliboi & Co was the IL&FS auditor. It had been appointed for a five-year term FY18-FY22. For over five years before that the company was audited by Deloitte Haskins & Sells.