Professional accountants – Addressing the audit and advisory services conflict of interest

All over the World where corporates play a significant Role in Economic activity, there is a realization within Professional Accountants firms and the external corporate stakeholders like Board of Directors, Shareholders, Investors, Employees, Financiers, Creditors, etc that the current structure is broken and there is a need to fix the same. What is more worrisome is that Audit as an Activity and as a Profession is losing value.

Audit serves the primary purpose of stating that the corporate entity is a going concern, that accounting discipline as per Accounting Standards has been maintained in recording financial business transactions, that assets and liabilities are properly valued, that income and expenses are in sync and running on parallel tracks and there is no fraudulent behaviour detected which could impact the corporate and the interests of the various stakeholders in the corporate.  Audit is also the only shield available against the attacks that corporates are manipulative, self-centered and greedy.

Sadly, all over the World demands on Audit Requirements and Audit disclosures and multiple compliance requirements have forced the Audit profession into an oligopoly where just 4 firms control the audits of many large listed entities – nationally and internationally. To address this requirement, corporate law in India was changed to force change in Audit firm for corporates after a certain number of years.

This has worked only partially because the rotation is happening only with the big 4 firms (EY, PWC, Deloitte and KPMG).  The rotation policy has not really changed anything on the ground.

It is clear that Indian Audit firms have failed to Crack the Audit Code. It is therefore necessary that Govt, Regulators, Audit Institutes and the Audit Profession itself comes to an action plan to address this loss of credibility and confidence. My views on the same are as under:

1. In India, Audit and Advisory business cannot run together under the same firm name. There must be a total separation of these two professional services. In many cases, fungibility between these two enables a firm to quote low Audit fees so that Advisory services get the income cream. In summation, the firm gets good income from the client but Audit quality may suffer due to low income.
2. The break of Audit and Advisory services must get matched with a consolidation of Audit firms. On the grounds of being scared of ‘big’ entities, India has given birth to pygmy Audit firms. We need a change in this thinking. Audit firms must merge to create larger firms who can to an extent compete in size and competence with the Big 4. If for some reason merger is not a viable option, then there is a need for working together with one Audit firm strong in a geographical region conducting Audit on behalf of the Principal Audit Firm and giving a detailed Audit Report to the main Audit Firm on the localized Audit entity it audited.
3. Corporate Law Ministry and Regulators must insist on Joint Audit of all listed entities and / or entities of a certain size as per an agreed matrix. The joint Audit cannot be of two Big 4 Audit firms.
4. Audit has always been the poor cousin to Advisory work. This equation has to change so that Audit attracts the best professionals who have competence and get competitive compensation. Some very tough Audit review processes by competitive firms have to be mandatory established so that Audit gets its worth and value back.  The Board of Directors must get the results of these Audit Reviews so they know the Quality of Audit work that the corporate is receiving.  

While internationally, Audit problems and limitations are being woken up to – in India we continue to believe that there is no problem affecting the Audit profession. This living in self denial is dangerous. We need to be pro-active and recognize that there is a problem and find a solution within.

Corporate structure can permit a supposed listed entity to be run like a family promoter entity. The other stakeholders of such entities are looking at Audit / Auditor to look after their interests. They must not be let down. 

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