When we start a business first the tension who will be the accountant.
When a new business is started, first and foremost problem is to select and engage an accountant. The things what we consider when we start, interview, select and engage an accountant are their
- Geographical presence.
- Domain experience.
- Market value , etc
when we try to shortlist, we can find two types of accountant or audit firms in India, Indian audit firms and multinational audit firms. Small companies prefer Indian audit firms and medium and large companies they will go for big multinational companies. Accounting is a big business and India is a fast developing market. there is great business opportunity for accounting firms in India, as the laws as well implementation is tough. Multinational audit firms are making big business in India, but when we closely analyse, no Indian auditing firm has grown in that size, like a multinational firms.
The reason for not becoming big for Indian Audit firms.
In India the audit firms are regulated by rules framed by The Institute of Chartered Accountants of India, and it clearly says that no audit firms can solicit business by giving advertisements in any forms other than having name on its official documents and visiting cards. This provision is to ensure that they are not marketing themselves with self-proclaimed expertises. The business they receive should be the result of their expertise and should not be through advertisements and propaganda, to avoid undue marketing and improve efficiency. So the growth was more or less natural and conservative.
But the Multinational Audit firms like Ernst and Young, PricewaterhouseCoopers, KPMG etc made big inroads to auditing market in India. When we analyse their growth the primary thing which contributed to their growth was their advertisements about international experience and facilities. When we deeply go into their invent we can understand that actually they are not authorised to establish business in India under various laws and regulations and they entered flouting the rules.
Background check – growth of multinational audit firms in India.
Reserve Bank of India is the authority which need to grand licence for the purpose of providing auditing services in India for firms outside India. In 2004 RBI refused such licences and not allowed Multinational Audit Firms to start their core business in India. As the market was growing and big, they were not ready to forgo. So they approached Foreign Investment Promotion Board for providing consultancy services in India and they got it. This licence which they have received for providing consultancy services they have used for providing accounting, auditing and book-keeping services in the name of consultancy services.
Multinational Audit firms are using their Indian affiliates to do their business as they themselves can not do that directly.
The expert committee by the Institute of Chartered Accountants of India on its report titled Operations of Multinational Network Accounting Firms clearly acknowledging that the government policies do not permit Foreign Direct Investment (FDI) in the field of accounting, auditing, taxation and booking services.
How Multinational Audit firms are able to do FDI in Indian firms.
Foreign Exchange Management Act provided that a person resident outside India other than Non Resident Indians or Person of Indian Origin need to apply and seek for approval from RBI for any investment by way of contribution to the capital or a firm or proprietary concern or any association of persons in India. In addition to that the are not authorised to invest in specified services route through FDI also.
To overcome these two limiting or prohibiting rules they found a different way. They invest as interest free loans or grants to their Indian partners for the control of their firms. Through this method they escapes from the legal provisions and are able to provide the business of accounting in their name.
In the last twenty plus years they succeeded in controlling more than half of the total accounting services in India, and most of the top listed companies and fortune companies are using the services of these Multinational Auditing Firms. There is one more problem, according to Chartered Accountants Guideline, it is clearly mentioned that an audit firms is not supposed to accept any income, fee or percentage from a person or entity which is not having some prescribed qualification. Accepting interest free loans or grants also surely will come under these rules and thus unethical.
It is clearly evident that they are flouting all rules and regulations for conducting their business in india, they are also doing advertisements for brand building which if done by Indian firms amounts to professional misconduct. The CAA firms of India which have tie up with Multinational Audit firms use the name of Multinational Audit firms in their documents prominently to create a feeling that they are associated with such companies to gain more business.
To conclude, the actions by the Multinational Audit Firms in collusion with selective Indian audit firms to gain business, are blatant violation or flouting of rules framed by the government and Institute of Chartered Accountants of India. These actions also deny a level playing ground for India firms which is regulated and abided by professional ethics and rules. There are many instances where such big names helped big companies to do all accounting malpractices and the stories came to public also. One of such example is Sathyam computer fiasco and subsequent prosecution of world-famous multinational accounting firm.
So if we delay more on regulating and providing a level playing ground the problems are going to increase both for the profession and for auditing.