Over the past couple of years, we have noticed that the financial statements of many smaller Indian companies are audited not just by non-Big4 auditors, they are audited by small audit firms which have never before audited the accounts of listed entities. In fact, this article says: “The Big 4 (or now, 5) firms have long dominated the audits of India’s largest listed companies. Deloitte, EY, KPMG, PwC and Walker Chandiok (a Grant Thornton affiliate) audit 62% of the Nifty 500, still a lower concentration than in other markets.

And their share drops to 30% as client size decreases. Taking on the audits of those companies are hundreds of smaller firms. For instance, more than 550 Indian auditing firms have just one listed company among their clients, according to Prime Database.” [Underlining is ours]

So why are we seeing smaller auditors mushroom in India?

As per this interview by veteran journalist Menaka Doshi of N Venkatram, the former CEO of Deloitte India, the reason for this is: “Concern over regulation and risk has large firms like Deloitte effectively cherry picking audits in India.

Between 2015 to mid-2023, when Venkat was CEO, the contribution from auditing fell to a fifth of Deloitte’s revenue, from more than 60%.
Rotation also narrowed the audit market, while rapid growth in advisory and other services expanded other revenue. Then came the IL&FS scam that may yet cost Deloitte a ban, and made the firm much more selective about clients.

The outcome was a reordering among the Big 4 and the rise of at least two other firms — Walker Chandiok and, more recently, MSKA & Associates (a BDO International member firm).

This year, MSKA picked up two audits that Deloitte exited — that of flailing edtech giant Byju’s, which hasn’t filed financial results since fiscal year 2021, and Adani Ports, where Deloitte raised concerns about potential related party transactions.”

Mr Venkatram says that once the smaller audit firms – who are currently happily taking on listed companies’ audits – realise what they have bitten into, they too will start shying away from these audits: “”They haven’t been bitten,” he said. “Once they find that the regulatory framework does not understand the accountant’s framework and they get questioned a couple of times, they will also realize that it’s not worth the risk.”

The accountant’s framework refers loosely to a long list of defenses auditors have put up when questioned about rising audit failures.

For instance, an auditor can flag the lack of disclosure on related parties, but not investigate if a party is related or not.

The auditor of a holding company in India doesn’t have to audit subsidiaries but is expected to know what’s happening at the subsidiary level. “What visibility can we get in a company that has 300 subsidiaries?””

If the ramp up in the legal & reputational risks associated with auditing were not enough, the industry also faces a talent crunch: “A talent crunch is looming, too, like in other markets. “Nobody wants to be a partner anymore,” said Venkat. “Too risky.””

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