Auditors shifting out of jobs at financial companies to comply with new RBI guidelines

Auditors have begun shifting out of assignments at financial companies to comply with the latest guidelines from the central bank, which had shortened audit terms at high-street banks, other types of lenders and financial-services firms in its guidelines aimed at improving the quality of oversight.

As per Prime Database, more than 30 auditors have already rotated out from their assignments citing the RBI guidelines and multiple auditors have told ET that scores of such conversations are on with audit committees and a spate of resignations can be expected over the next month or two.

In some recent movements, EY affiliate SRB & Co has rotated out of IL&FS and Bajaj Finserv, while SR Batliboi & Co exited Repco Home Finance and Cholamandalam Financial Holdings.

Untitled-5Agencies

KPMG affiliate BSR & Co has quit MAS Financial, while Deloitte has rotated out of Capri Global Capital, L&T Finance holdings and Manappuram Finance.

On April 27, the Reserve Bank of India (RBI) had issued guidelines for appointment of statutory auditors of commercial banks, NBFCs and housing finance companies, mandating sweeping changes to provisions regarding selection of auditors, including cap limits, a cooling off period, non-audit curbs, and a 3-year tenure in a bid to bring greater transparency and raise audit quality.

Most of the exits in both big and small Indian audit firms are due to ending of the 3-year tenure, cap limits and conflict with non-audit work.

The April circular notification had called for immediate implementation, having no transitional provisions (barring less than six months for NBFCs to implement).

The top firms have had to undertake an portfolio exercise with focus on which audits to get out from within a client group, where it made economic sense to offer lucrative permissible non-audit services——like cyber security, data privacy, IT, legal compliance and tax advisory— and which companies posed an association risk due to RBI’s new tougher oversight rules.

Experts say that the big firms had to juggle their client and service portfolio but they didn’t lose much.

“It’s worked out very well actually for the big firms who have given up smaller unprofitable clients and signed up bigger ones or revised fees upwards significantly. The max 3 year term is what I hope gets reconsidered and aligned to Companies Act term of 5 years as a shorter term doesn’t help anyone – user, preparer, auditor or regulator,” said Vishesh Chandiok, CEO, Grant Thornton LLP.

The big audit firms did struggle while dealing with conglomerates with a portfolio of finance companies because the guidelines say that an auditor could audit only one company.

The regulator has also placed restrictions on audit/non-audit services and has given a much wider definition of the ‘group’ where these restrictions apply thus complicating matters for the top firms which usually grab a wide variety of the work from such engagements.

“A lot of planning and analysis has gone into where we want to be engaged and what kind of services we want to offer,” said a partner with a Big Four.

Experts say that smaller audit firms will get a good chunk of audits that are being rotated and Big Four affiliated audit firms will just focus on quality companies—maximum 250 to 300 companies between all—operating in the RBI regulated financial universe.

Two major consequences of the churn are that the top firms are having to redeploy audit resources in non-audit areas or other audits and they are now demanding higher fees courtesy the additional work they would have to do due to additional RBI oversight demands.

“An auditor will not just audit an NBFC now but he will have to look at indebtedness of the whole group, study fund flow of NBFCs into promoter entities etc. We will need to be fairly compensated for complexity, spread and size of the audits. The new regulations will mean we have to deploy more resources and spend more hours on each audit,” said an audit head of a top firm.

Whereas, a big worry for financial companies looking for new auditors is transitioning to a smaller audit firm which might be under-resourced and might not be able to handle the complexity of the business.

( Originally published on Oct 13, 2021 )

Auditors shifting out of jobs at financial companies to comply with new RBI guidelines

Auditors have begun shifting out of assignments at financial companies to comply with the latest guidelines from the central bank, which had shortened audit terms at high-street banks, other types of lenders and financial-services firms in its guidelines aimed at improving the quality of oversight.

As per Prime Database, more than 30 auditors have already rotated out from their assignments citing the RBI guidelines and multiple auditors have told ET that scores of such conversations are on with audit committees and a spate of resignations can be expected over the next month or two.

In some recent movements, EY affiliate SRB & Co has rotated out of IL&FS and Bajaj Finserv, while SR Batliboi & Co exited Repco Home Finance and Cholamandalam Financial Holdings.

Untitled-5Agencies

KPMG affiliate BSR & Co has quit MAS Financial, while Deloitte has rotated out of Capri Global Capital, L&T Finance holdings and Manappuram Finance.

On April 27, the Reserve Bank of India (RBI) had issued guidelines for appointment of statutory auditors of commercial banks, NBFCs and housing finance companies, mandating sweeping changes to provisions regarding selection of auditors, including cap limits, a cooling off period, non-audit curbs, and a 3-year tenure in a bid to bring greater transparency and raise audit quality.

Most of the exits in both big and small Indian audit firms are due to ending of the 3-year tenure, cap limits and conflict with non-audit work.

The April circular notification had called for immediate implementation, having no transitional provisions (barring less than six months for NBFCs to implement).

The top firms have had to undertake an portfolio exercise with focus on which audits to get out from within a client group, where it made economic sense to offer lucrative permissible non-audit services——like cyber security, data privacy, IT, legal compliance and tax advisory— and which companies posed an association risk due to RBI’s new tougher oversight rules.

Experts say that the big firms had to juggle their client and service portfolio but they didn’t lose much.

“It’s worked out very well actually for the big firms who have given up smaller unprofitable clients and signed up bigger ones or revised fees upwards significantly. The max 3 year term is what I hope gets reconsidered and aligned to Companies Act term of 5 years as a shorter term doesn’t help anyone – user, preparer, auditor or regulator,” said Vishesh Chandiok, CEO, Grant Thornton LLP.

The big audit firms did struggle while dealing with conglomerates with a portfolio of finance companies because the guidelines say that an auditor could audit only one company.

The regulator has also placed restrictions on audit/non-audit services and has given a much wider definition of the ‘group’ where these restrictions apply thus complicating matters for the top firms which usually grab a wide variety of the work from such engagements.

“A lot of planning and analysis has gone into where we want to be engaged and what kind of services we want to offer,” said a partner with a Big Four.

Experts say that smaller audit firms will get a good chunk of audits that are being rotated and Big Four affiliated audit firms will just focus on quality companies—maximum 250 to 300 companies between all—operating in the RBI regulated financial universe.

Two major consequences of the churn are that the top firms are having to redeploy audit resources in non-audit areas or other audits and they are now demanding higher fees courtesy the additional work they would have to do due to additional RBI oversight demands.

“An auditor will not just audit an NBFC now but he will have to look at indebtedness of the whole group, study fund flow of NBFCs into promoter entities etc. We will need to be fairly compensated for complexity, spread and size of the audits. The new regulations will mean we have to deploy more resources and spend more hours on each audit,” said an audit head of a top firm.

Whereas, a big worry for financial companies looking for new auditors is transitioning to a smaller audit firm which might be under-resourced and might not be able to handle the complexity of the business.

( Originally published on Oct 13, 2021 )

Audit firms eye global tie-ups to upgrade skills, build bandwidth

NEW DELHI: With an aim to upgrade skills and build their bandwidth, an increasing number of domestic audit firms are looking for global tie-ups to take on multinational giants in the sector. The aim is to become globally more competitive by deploying stronger processes already being followed by the global audit firms in delivering audit mandates.

“There has been a significant jump in the number of mid-sized Indian audit firms looking for global tie-ups in the recent past. More than a dozen such firms have approached various global players in past few weeks,” said a consultant who is helping local firm scout for a foreign partner.

The primary reason being cited is the growing complexity in businesses, which auditors must understand to deliver a high-quality audit, compounded by the fear of stringent action by regulatory and investigating agencies for negligence or collusion by them in cases of corporate frauds and business failures.

In recent times, there has been a spate of actions against auditors, including against PwC in the Satyam case and against Deloitte and BSR in the IL&FS matter.

The Supreme Court recently stayed an order by the Securities Appellate Tribunal, which held that Sebi lacked powers to bar auditors, after the capital markets regulator contested a SAT ruling that had quashed a two-year ban on PwC in connection with the Rs 7,800-crore Satyam scam.

In the IL&FS case, the NCLT had launched proceedings against the company’s erstwhile auditors but the Bombay High Court later granted a stay. Besides, some auditors were recently arrested by the Economic Offences Wing of the Mumbai Police in the NSEL matter, though they were released subsequently on bail.

Some auditors, including in the case of IL&FS matter, have also come under the scanner of the Serious Fraud Investigation Office (SFIO), while National Financial Reporting Authority (NFRA) is looking into alleged accounting lapses at

Infosys

.

The regulatory and government officials have often pointed out that auditors are supposed to be the conscience-keepers of a company and it is their duty to ring the alarm bells even at the slightest hint of a financial wrongdoing.

Within the auditor community, there is a growing feeling that the globalised businesses of the clients they serve call for the latest audit techniques and processes and their absence can be seen as a major obstacle in delivering on the audit mandate.

A robust IT infrastructure is the another biggest gap area that the domestic audit firms are looking to address through global tie-ups.

“Lack of a strong technology infrastructure has been an area of concern for Indian audit firms in carrying out audit for their clients. An effective IT infrastructure at the auditor’s end calls for a substantial investment and a global tie-up or getting associated with a multinational network can help significantly on that front,” said an audit committee head at a Nifty-50 company.

At the same time, the prevailing macro-economic environment is creating multiple challenges for the industry, while a negative narrative that has got built around the audit profession is making the things worse, experts said.

Vijay Gupta, ex-central council member of the ICAI, said, “Global tie-ups provide local audit firms access to better processes and practices already undertaken by the global partner, thereby building a much-needed bandwidth to serve the clients”.

He cited the resource constraints faced by local firms as crucial for pushing them towards global tie-ups, and said the aim is to have a better IT infrastructure to create a more robust audit framework.

“The liability mechanism for auditors is an area that needs to be duly addressed. Drastic actions are being taken against auditors even in the absence of being proven guilty,” said an auditor working with a leading firm.

He said a complete ban on any audit firm has a much larger impact on the industry and on people working in it.

On the other hand, officials at regulatory and enforcement agencies have been saying that audit firms tend to put the blame on inpiduals after finding themselves in the dock for their alleged role in frauds.

Experts opine that availability of trustworthy financial information on performance of companies is important for proper functioning of a market economy, but the entire auditing system has got into a precarious situation as questions are being raised around integrity of auditors.

Serious concerns arise if auditors’ independence is compromised or when trust reposed in them gets betrayed as independent audits are fundamental to taking informed and correct investment decisions.

Experts feel that it is important to facilitate a business-friendly environment for corporates as well as for professionals in India and therefore it is vital that Indian laws and regulations on professional services keep pace with the changing market dynamics.