SEBI ban of PwC leads to a new struggle for audit and auditors

This comes exactly nine years after the confession by B Ramalinga Raju, Chairman of erstwhile Satyam Computer Services Limited (whose accounts were audited by PwC), to financial fraud and manipulation amounting to Rs 7,136 crore from 2003-2008.

The scam led to a series of events that led to Raju’s prosecution and the company's takeover by Tech Mahindra.

Lingering uncertainty

While uncertainty lingers on the 75 listed companies PwC audits, including Tata Steel, Motherson Sumi, Reliance Power and Hindalco Industries, even if they manage to get a stay on the Sebi ban, its other services will hit PwC negatively.

Rivals, especially three of the Big Four -- KPMG, Ernst & Young, Deloitte have already managed to grab PwC's clientele since the India’s Enron scandal unfolded in 2009, shocking the stock markets and calling for scrutiny from several investigative agencies.

PwC reportedly receives 30 percent of its revenues from audit practices with over 70 companies as clients, while the rest comes from advisory and consulting.

A senior official working with one of the Big Four on the condition of anonymity said, “Audit is huge part of PwC’s business here. They will suffer a loss and take a hit on the clientele for not just audit but other services and at the same time getting a new client will be difficult. one of the Big Four official said

However, some call it too late and not so useful an action.

Amarjit Chopra, former president of Institute of Chartered Accountants of India feels the action is "too harsh for the fault of just two firms (two PwC affiliates)".

He said, "Almost 60-70 percent employees who were there at that time would have left the firm now, rules change and now you debar the firm after nine long years. You must levy a severe penalty for sure. But fraudulent practices happen not because of the auditors but the greed of the promoters."

Role of auditors under lens

The role of auditors, being the most visible and reliable gatekeepers of accounts, going forward, will henceforth, be closely scrutinised even further.

Although PwC said it was "disappointed" by Sebi's move and that it "played no part and had no knowledge of" the fraud, it added, "We have, however, learned the lessons of Satyam and invested heavily over the last nine years in building a robust and high-quality audit practice.”

PwC has over 3,000 employees in India, covering 11 accountancy affiliates. It has been given until March to finish the audits of existing clients, and if it does not win a stay order, it will be forced to cease operations for two years.

Under Indian corporate law, companies hire an audit firm for only five years, after which they are forced to rotate. The appointment of an auditor requires a shareholder resolution and board approval. But for removal, the first step would be for Price Waterhouse to offer to resign.

However, if it doesn't resign, which is likely if they get a stay, companies' Boards and shareholders may be forced to remove them.

Audit practices going forward

Tandon called this is a global phenomenon and that there needs to be more competition majorly among homegrown players thereby creating more capacities.

The challenge, he said, "...is that the gap between Big Fours and other firms is going up. If you see 10-12 years back or before, we had some smaller firms like Batlibois (Batliboi & Purohit, Chartered Accountants), Billimorias, (S.B. Billimoria And Company), etc…had some affiliations with global brands yet were still home grown but now we do not have enough domestic capabilities.”

As per reports, the Big Four handled a high 420 assignments of the total 1,589 companies, or 26 percent of the total in 2016-17 (financial year ended March 2017),while among the Nifty 50 companies, they give services to over 50 percent of the companies.

Even the Uday Kotak committee’s report on corporate governance highlighted that the two important gatekeepers are independent directors and auditors. Other suggestions also focus on how do you strengthen their ability to take audits without getting pushed by the companies and also make auditors more accountable.

Audit and Dominance of Big Four

Auditing profession is anyways being avoided and it will become lesser attractive, Chopra said adding this will further drive away interest as the entire organisation suffers.

Tandon said, “We can have a concept of joint auditors (I may be a minority here) but maybe have a large and small firm working together where the smaller firm learns some of the skills. But first, we need to be mindful that the Big Four cannot be dominating the market."

It remains to be seen if PwC manages to get a stay order, what will its clients decide and will the regulator and government based on the new Kotak Committee implement further stringent norms towards professionals.