Strengthening the practice of audit: Govt has to provide a level-playing field

Published: November 22, 2018 4:19:59 AM

Govt has to provide a level-playing field by laying down clear guidelines on how firms with global affiliations should operate in India.

In India, there is a misconception of the relationship between the Indian associate and the global firm—it is thought that it is one of control by the latter, like a parent and subsidiary.

By Akhil Bansal

While investment opportunities are not bound by borders, access to them is often limited for investors. But Indian MNCs have been quick learners in internationalisation both in scale and speed. Statistics reveal the big picture. The number of Indian companies that have made it to the Forbes 15th annual ‘Global 2000’ list for 2017 now stands at 58. This list is the ranking of the world’s biggest, most powerful and valuable publicly-listed companies.

While India has in place both inward and outbound investment policies and norms, navigating the complexities of an interconnected and interdependent world economy needs external assistance. When an Indian company lists equity directly on exchanges abroad, there are expectations of stakeholders on disclosure of financial information. Corporations, business leaders and boards of directors need to be conversant with the demands and imperatives of globalisation that necessitate credible global auditors with multidisciplinary skill-sets. Large multidisciplinary audit firms today have evolved over time in support of international businesses they serve and offer a consistency of service across territories.

They facilitate the growth of the global economy by working alongside expanding global businesses that invest and grow in new territories and countries. Also, credible auditors help companies adapt not only to the applicable Indian regulatory regime, but also help them comply with the jurisdictions in the countries they have invested in.

Indian corporations that become global seek help from these firms to provide consistent high-quality audits in their countries of operation because the current business scenario demands multidisciplinary skill-sets. These large firms also contribute to the professional ecosystem, creating local talent and capacity and facilitating ease of doing business.

A high-quality audit needs support from specialised professionals having skills in the fields of law, taxation, IT, forensic, cybersecurity and secretarial services. Valuation specialists inspect valuations of businesses, assets and financial instruments. IT specialists look at controls, systems audits and cybersecurity. Forensic specialists are brought in for fraud and risk management.

While specialists add fresh perspective to the audit and ensure a breadth of industry knowledge, they come at a price that global firms can afford. It is more economical for such investments to be made on a global basis so that the cost of investment can be absorbed optimally. In the absence of such investments, the Indian audit professional may not be able to keep pace with the rapid changes in the environment, thereby increasing audit risk for Indian companies and their stakeholders. Auditors whose operations are confined to India may not have the ability to address all audit risks that arise from global operations.

Firms are in a better position to attract and retain talent—if they provide staff with access to global clients, global tools and knowledge bases, and the potential to work in multiple jurisdictions. In the absence of these attractions, Indian audit firms may not be able to recruit and retain high-quality talent that is essential for high-quality audits. Globalisation provides an opportunity to bring in a vast array of professionals with varied skill-sets and talents that can be offered to the fast-growing Indian economy.

Well-rounded and globally-networked professional services firms are in a much better position to serve such companies that have raised or may seek to raise debt and equity capital in international markets. Expanding and broadening the benefits of globalisation will bring in benefits in terms of expansion and outreach for the accounting and auditing profession in India. But before that can happen, it is critical that there is clarity on the regulations governing networking arrangements with global firms.

In India, there is a misconception of the relationship between the Indian associate and the global firm—it is thought that it is one of control by the latter, like a parent and subsidiary. What needs to be clarified is that Indian entities are autonomous partnerships that are associated with the global network for technical know-how rather than owned by another entity. India could consider allowing such firms to operate as Indian partnerships or by allowing them to use the firm’s global brand names, either standalone or in combination with a local name—the path followed by China and Japan. This provides greater confidence to overseas investors—an important consideration for India which is reliant on FDI to create employment.

To ensure that firms of varied sizes and with different structures can coexist in a large market like India, the government needs to provide a level-playing field by laying down clear regulations and guidelines on how firms with global affiliations need to operate in India. This could include guidelines around ownership structure and networking regulations, as appropriate. With the establishment of bodies such as the National Financial Reporting Authority (NFRA), the implementation and monitoring of these regulations could be performed independently.

To strengthen the practice of audit in India, the government or industry could consider establishing a Centre for Audit Quality that would meet the emerging needs of the Indian audit profession. This body could invest in creating tools, methodologies, training material, knowledge bases and so on that can be made available free of cost to its members, which would include small and medium-sized firms. A successful example of such a body is the Foundation for Auditing Research (FAR) in the Netherlands. A similar body in India could provide unique collaboration between science and industry to drive audit quality and strengthen the audit industry’s learning curve.

Large accounting firms with effective collaborations act as a fulcrum of our nation’s growth. They pave the way for Indian firms seeking global presence and help local firms to have efficient connectivity to state-of-the-art global standards, while steering growth in India’s favour and strengthening the practice of audit. Regulators should thus prioritise quality, consolidation and building capacity of these firms, instead of treading on an uneven and unrewarding path of protectionism.

The author is Deputy CEO, KPMG in India. Views are personal.

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