Ban on audit firms may not hit their entire network

NEW DELHI: Any ban on audit firms may not impact those entities that are part of their networks or their lead partners, a senior government official said. This implies that disruption from a possible prohibition on Deloitte Haskins & Sells and BSR & Co, a KPMG network firm, may not be as widespread as earlier presumed.On the other hand, the government is set to tighten restrictions on audit firms to minimise conflicts of interest, the official said. These will apply to non-audit services offered to the companies they’re auditing, he said. Earlier, this month, the Reserve Bank of India had barred audit firm SR Batliboi & Co, an EY member firm, from auditing commercial banks for a year starting April 1, citing lapses in a statutory audit.“There is a lot of difference between an audit firm being debarred and the network being debarred,” he said. “There may be more than one firm associated with the brand name. The ministry has not asked for debarring the use of the brand name.”The Ministry of Corporate Affairs (MCA) has sought a five-year ban on Deloitte Haskins & Sells and BSR & Co following an investigation into their role as auditors of IL&FS Financial Services (IFIN). The Serious Fraud Investigation Office (SFIO), MCA’s inquiry wing, has alleged that the auditors colluded with the management to conceal information and falsify accounts. 69951103 ET reported on June 12 that KPMG network firms audit 175 listed companies while the count is 167 for the Deloitte network.Prohibited List of Non-audit ServicesThese companies account for about 40% of the market capitalisation of listed companies, according to Prime Database. Deloitte has seven firms while KPMG has six in India. In India, the Big Four firms — EY, KPMG, Deloitte and PwC — operate through separate local entities to abide by Institute of Chartered Accountants of India (ICAI) rules. The official said that conflict-of-interest rules will be strengthened.“The prohibited list (of non-audit services) may have to be extended, or there can be a cap on the revenue you generate though non-audit services as a percentage of (revenue from) audit service or you can completely ban nonaudit services to an auditee firms or its associates and subsidiaries,” he said.The Companies Act prohibits some non-audit activities, including accounting and bookkeeping, investment advisory, investment banking and management services. The idea is that audits should not be influenced by any other consideration, said the official.Such steps are being debated in developed economies as well, the person said. The UK government, for instance, is considering a plan to get the Big Four firms to separate their audit and consultancy businesses.Some auditors backed the Indian proposal, saying it will eliminate the subjectivity that clouds the current list of such non-audit services.“Restricted services are subjective in nature and therefore open to various interpretation, and in some cases, associate or network firm (of the auditor) is able to keep it out of disqualification criteria,” said Ankit Singhi, partner at Corporate Professionals. He said the government should broaden the disqualification criteria or provide a maximum cap on revenue from non-audit services instead of a complete ban on nonaudit services.The shock default by Infrastructure Leasing & Financial Services (IL&FS) on repayments in September last year led to a liquidity crunch at nonbanking finance companies (NBFCs) that has roiled the country’s financial markets.

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